Bonds, debt swaps among finance solutions to adapt to climate change

News24

07-05-2025

There are several barriers to attracting private capital to fund climate adaptation measures, but collaboration by the private sector, governments, climate funds and multilateral development banks could plug finance gaps, writes Nigel Beck.
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As the world grapples with escalating climate risks and impact, South Africa stands at a pivotal juncture.
The nation's economic, social and environmental vulnerabilities underscore an urgent need for climate 'adaptation'.
Defined as the process of adjusting to current and future climate impacts to reduce harm and seize opportunities, adaptation is not just a theoretical exercise; it's a socioeconomic imperative for South Africa and the broader African continent.
Amid discussions at the G20 and COP29, adaptation finance emerges as a critical lever to build resilience; yet, significant obstacles hinder its implementation. But what does adaptation mean for South Africa and why is it so important? We consider the barriers to private sector financing, and how global frameworks can catalyse progress.
What is climate adaptation?
Climate adaptation involves proactive measures to mitigate the impacts of climate change - such as drought-resistant crops, flood-resistant infrastructure, or water reclamation projects.
Unlike mitigation, which focuses on reducing greenhouse gas emissions, adaptation prepares communities and economies for inevitable changes.
In South Africa, this translates to safeguarding water security, bolstering food systems, and fortifying cities against extreme weather. The Presidential Climate Commission's March 2025 report highlights key programmatic areas: resilient water, agriculture, cities, and transport, estimating a financing need of R866 billion by 2030 (1.37% of GDP).
Globally, the UNEP's 2024 Adaptation Gap Report pegs developing countries' needs at $387 billion (about R7 billion) annually through 2030, with Africa alone requiring $579.2 billion (about R11 billion) from 2020-2030 per its Nationally Determined Contributions (NDCs).
Why adaptation matters to South Africa and Africa
South Africa's climate challenge is stark.
Temperature anomalies have risen over the past century, and economic damages from floods, heatwaves, and droughts are projected to intensify, with losses potentially reaching R1.4 trillion annually by 2050 if unaddressed. For a country already battling unemployment, inequality, and energy insecurity, these risks threaten to unravel developmental gains.
Africa, meanwhile, faces a disproportionate burden. Despite contributing less than 4% of global emissions, it requires vast adaptation investments to counter rising climate-induced disruptions to agriculture, water, and infrastructure.
Adaptation is a smart investment. Projects like eMalahleni Water Reclamation Plant, which treats acid mine drainage to supply potable water, or the Working for Water Programme, which removes invasive plants to restore river flows, demonstrate tangible benefits: job creation, resource security, and economic stability.
For South Africa, a leader in the region, scaling and replicating such initiatives could position it as a model for Africa, where adaptation finance flows remain woefully inadequate.
Obstacles to private sector financing
Despite its promise, adaptation struggles to attract private capital.
Several barriers stand out. First, perception casts adaptation as a public sector duty, deterring private investment. This is compounded by information asymmetry - private players lack reliable climate risk data, unlike the quantifiable CO₂ reductions of mitigation projects. Measuring the effectiveness of a drought-resistant crop, for instance, is far trickier than tallying carbon emissions avoided by a solar farm.
Second, nomenclature and frameworks confuse investors. Terms like 'green,' 'blue,' and 'adaptation' are used interchangeably.
Third, shallow capital markets in Africa limit bond mandates not just for adaptation, with investors chasing risk adjusted returns elsewhere. High borrowing costs, driven by real or perceived risks and long-term investment horizons, further deter engagement.
Finally, adaptation's benefits - environmental, social, and economic - are hard to capture fully. The Adaptation Fund mobilised $133 million (about R2 billion) at COP29, yet such commitments often stall in translation to on-the-ground projects. In South Africa, R18 billion in domestic public funding and R113 billion internationally flowed to climate finance in 2023, but private sector contributions remain underreported and unscaled due to tracking difficulties and a focus on insurance over broader resilience.
The role of innovative finance and global frameworks
Innovative financial instruments offer hope.
Climate adaptation bonds - direct funds to resilience projects while spreading costs over time and attracting diverse investors. Outcome-based instruments tie funding to measurable results, enhancing accountability and investor confidence.
Debt-for-adaptation swaps, as seen in Seychelles' $30 million (about R550 million) debt reduction for climate resilience, free up resources for vulnerable, debt-laden nations. Blended finance, combining public concessional funds with private capital, mitigates risk, as demonstrated by Acumen's Resilient Agriculture Fund.
Yet, these tools alone cannot compensate for underdeveloped markets or macro risks like political instability. South Africa's currency volatility and Africa's hard-currency dependency highlight the need for deeper structural reforms.
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Here, the G20 and COP29 provide critical platforms. The G20's focus on country-led adaptation platforms aligns with South Africa's emerging Climate Adaptation Platform, which seeks to coordinate government, private sector, and community efforts.
COP29's Baku Adaptation Road Map and $133 million in pledges underscore global momentum, building on the UAE Framework for Global Climate Resilience from COP28. With National Adaptation Plans due in 2025 and COP30 set to prioritise adaptation finance, these forums can drive standardised taxonomies, de-risking mechanisms, and data improvements -80% globally interoperable, 20% locally tailored, as suggested in financing discussions.
The path forward
South Africa must bridge the technical-finance divide.
A Presidential Climate Commission-style platform, backed by interministerial leadership and early funding from philanthropies, can operationalise strategies. Key steps include regulatory reforms (tax incentives, climate disclosure mandates), enhanced climate risk data via AI and satellites, and a narrative shift - adaptation as a profit-and-loss opportunity, not a cost sink.
Collaboration is non-negotiable: governments, Multilateral Development Banks, climate funds, and private players must co-create bankable projects.
The stakes are high.
With Africa's adaptation gap widening and South Africa's resilience hanging in the balance, adaptation finance is a lifeline. By leveraging G20 and COP29 momentum, South Africa can not only protect its future but also lead Africa toward a just, climate-resilient transition. The time to act is now - before the next flood, drought, or economic shock makes the case even clearer.
Nigel Beck, head of sustainable finance and ESG advisory at RMB.