Adaptation finance – Building resilience in the face of climate change

Africa is particularly hard-hit by the ongoing climate crisis – from increased climate-related losses to more insurance claims and struggling infrastructure.

It is therefore critical that insurance companies, who sit at this inflexion point of climate risk, help make adaptation finance real and feasible.

This is the theme of the final episode of Sustainability Talks, which is hosted by Michael Avery.

In this episode, Avery is joined by Nigel Beck, Head of Sustainable Finance & ESG at RMB, and Abel Sakhau, Chief Sustainability Officer at Sanlam.

Beck explains that there is a key distinction to be made between mitigation finance and adaptation finance.

Mitigation finance focuses on how businesses can lower their greenhouse gas emissions, while adaptation finance focuses on how businesses proactively evolve to address the physical construct that is climate change.

“Infrastructure is much more vulnerable. People are much more vulnerable,” says Beck.

“So proactively adapting to the actual impacts of climate change is increasingly critical.”

Insurers and adaptation finance

Sakhau explains that it is incredibly challenging for insurers to underwrite for adaptation finance.

“We are trying to underwrite a risk that might happen in future without stipulating what type of damage is going to happen,” Sakhau says.

He cites the example of the recent Limpopo floods.

“As an insurer, you ask yourself: ‘Would I have had models able to predict the extent of the floods’ impact?’”

“Because it's not just that we know we're going to have frequent floods, but it's the extent of infrastructure damage that we must measure.”

An additional challenge is that infrastructure built years ago is not necessarily prepared for current climate challenges.

The importance of education

Education is a big part of making adaptation finance feasible.

Homeowners must be educated on how building decisions for their homes affect their risk and safety in the scenario that climate crises like fires or floods hit.

“Those become conditions as part of their insurance – and if they don't maintain their property as per the conditions, any claim can then be repudiated,” says Sakhau.

 Approaching adaptation financing

Beck explains that adaptation financing has become more relevant than ever since the impact of climate change has increasingly manifested itself in physical ways.

He says that physical events come in two forms:

• Acute events such as floods or fires – sudden, short-term events
• Chronic events such as rising temperatures or droughts – those which have a continuous impact

Across both of these, the ability to quantify the financial impact climate events have on organisations and governments is important – something that has become increasingly possible in recent years thanks to the use of data and predictive analytics.

Furthermore, in the case of insurance companies, adaptation finance can be seen through the lens of risk prevention – particularly when it comes to building new infrastructure or rebuilding damaged infrastructure.

“This is not something we can approach from a short-term perspective,” says Sakhau.

“It is long-term – we have accepted that the realities of climate change are here.”

Sakhau also emphasizes the importance of maintenance in the adaptation financing process.

“If you’ve got infrastructure that is not maintained, it doesn’t matter the level of insurance and risk protection cover you have – that infrastructure is likely to fail,” says Sakhau.

This means that when working with entities like municipalities, it needs to be a partnership approach – municipalities maintain their infrastructure, and risk premiums can stay affordable.

Funding adaptation finance

Beck says that the recent COP 30 was notable for its focus on adaptation.

Adaptation finance currently accounts for approximately 5% of global climate finance, but a target has been set to increase it threefold by 2035.

Furthermore, adaptation finance is about 90% focused on the public sector – something that Beck believes must change.

To achieve this, organisations like RMB are looking into developing and offering adaptation finance products that make sense for private entities.

Increasing the role of adaptation finance also requires collaboration with other players in the South African infrastructure space – such as the engineers who build road networks, and the professionals who plan towns.