Raising private capital for adaptation projects in Kenya

Dead wild animal at Amboseli National Park.

A dead wild animal in Amboseli National Park on November 5, 2022. PHOTO | NMG 

As Kenya joins other countries and stakeholders at the 27th Conference of the Parties (COP) of the United Nations Framework Convention on Climate Change, the stakes are high for landmark talks and decisions to chart a global pathway for a low-carbon and climate-resilient future.

At this ‘African COP’, the key issues of high interest for the continent include climate finance, just transition, loss and damage, and adaptation finance.

A comprehensive financing framework for climate adaptation and resilience is critical for Africa. In Kenya, the current drought crisis in 23 out of 47 countries within the arid and semi-arid regions has worsened food insecurity situations for about 3.1 million people. The massive loss of livestock, which forms core safety nets for these people, is evidence that we are dealing with the biggest change in climatic conditions.

The estimated cost of climate change in Kenya is about five-10 percent of its gross domestic product, with the overall impact of the 2008-2011 drought in Kenya estimated at $12.1 billion.

For Kenya, adaptation is not just a policy priority, it is urgent and must happen across ecosystems, communities, and sectors, at speed and scale.

The economic and social costs of climate change could triple by 2040 if large-scale investments in adaptation are not urgently scaled-up. More than ever, adaptation should now be everyone’s priority and business.

Many experts have commended Kenya’s leadership on climate actions, locally and globally. The country is not devoid of policy frameworks that provide enabling environments and policy directions on adaptation and mitigation.

Since the Vision 2030 agenda was designed in 2008, Kenya has developed 10 climate-related policies, laws and action plans. That’s impressive by all standards. More impressive is that adaptation to climate impacts has centrally featured in all these frameworks.

The government and development partners have responded to the adaptation needs over the years.

Adaptation projects in Kenya, as in many African countries, are in dire need of predictable, additional and accessible finance. That is why COP27 must produce clear outcomes for developed countries making finance available for climate-vulnerable developing countries to adapt.

Public resources alone, both domestic and international, are not sufficient for adaptation investments in Kenya. More than 95 percent of all adaptation financing came from public sources. Private capital for adaptation has been extremely low.

This is despite adaptation covering multiple sectors such as agriculture, water infrastructure, disaster risk management, livestock management, forestry, natural resources, health, energy, and infrastructure — all core pillars of the Kenyan economy. Why then is private capital not flowing to adaptation actions?

At a recent event by the Kenya Bankers Association (KBA), I engaged with representatives of 50 local financial institutions who are members of the association on private capital for resilience projects in Kenya. The main tenets were that global leaders already considered climate change as the biggest risk facing businesses.

This implies that businesses are conscious of the need to climate-proof their internal operations to address climate risks while ensuring sustainability and profitability.

On the key challenge of the private sector’s abysmal investment in adaptation, there are a few barriers. First, the private sector suffers from some form of information asymmetries and knowledge gaps, which entails its limited understanding of climate risk and vulnerability data leading to little or no incentive to invest in adaptation.

Second, given that adaptation benefits and outcomes are qualitative and often non-monetary, the private sector still struggles with capturing environmental and social benefits – a reminder of a case of market failure.

Lastly, adaptation suffers from the tragedy of the horizon. Financiers often operate within short- to medium-term investment horizons due to their capital structures while many adaptation projects are inherently long-term in producing benefits.

Nevertheless, these barriers are not impossible to address. One key solution lies in innovative financing through a blended finance approach – a catalytic use of development finance or philanthropic funds to mitigate specific investment risks that may deter private capital in projects. To increase private capital for adaptation, the use of blended finance is crucial for three reasons.

One, making a business case for adaptation through cost-benefit analysis becomes imminent. Two, it offers enormous opportunities to expand the financial instruments for adaptation beyond concessional loans and grants, to include instruments such as equities, bonds, guarantees, and swaps, amongst others. Third, it creates the space for broadening the investor base to include new players such as insurance companies, capital markets, etc.

Agree on one thing: there is no shortage of private capital globally or even in Kenya. The global private sector holds at least $210 trillion in financial assets, which is about twice the gross domestic product of the entire world. Unlocking just one percent of those assets for investments in climate actions can trigger about $2 trillion of investments annually.

In conclusion, Kenya’s private sector may be at multiple framing crossroads. Should climate change be framed as a challenge or an opportunity? Should adaptation be framed as a cost or an investment? Should private capital move at the speed of light for adaptation interventions in Kenya or should it focus on its quantum size or even both together?

The political answer is it depends. It depends on the strength of the prevailing public and private engagement models in Kenya. It depends on the overarching incentive structures in place for taking risks on adaptation projects. It depends on many things. In any case, this is the beginning of a long conversation on making a climate-resilient Kenya a possibility.

The writer is the Regional Principal Officer, Climate Change and Green Growth (East Africa) at the African Development Bank.

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