Why Kenya urgently needs new framework for financing climate change adaptation

Kenya is witnessing an extended drought, and it is becoming evident that climate change is now directly and significantly affecting local livelihoods.

The country is only about 20 per cent arable, making it highly vulnerable to extreme weather events such as high temperatures, droughts and floods, which have grave implications on food security, economic growth, and social stability.

Urgent action is needed to build the resilience and adaptive capacities of sectors and communities to cope with climate change impacts and spur sustainable growth.

The Government estimates that US$44 billion is needed by 2030 to implement various adaptation interventions across key sectors. Despite this significant financing need, a report published on the landscape of climate finance in Kenya shows that much of the funds that flowed into the country in 2018 were directed towards mitigation action (79.8 per cent), and mainly for renewable energy projects. Only 11.7 per cent of financing was for adaptation, while the remaining 8.5 per cent went towards cross-cutting issues. This low investment, coupled with competing development priorities and lowered economic growth due to the impacts of Covid-19, makes raising the needed resources for adaptation action an uphill task. But it must be done.

For a long time, Kenya has depended on aid and grants to finance actions that address climate change impacts. These are largely designed as emergency responses, and have proven to be unsustainable. The need to find alternative, innovative and long-term strategies to raise adaptation finance is glaring.

 How can this be achieved?

 The adoption of a systemic approach that leverages on resources and expertise from the entire ecosystem of the public sector, foreign and domestic investors, financial institutions, development partners, research, and non-governmental organisations is a plausible approach. These actors could be converged within an innovative framework I would term as a National Adaptation Financing Framework (NAFF).

The starting point would be for NAFF to address key barriers to raising adaptation finance, while capitalising on existing and emerging opportunities. A top priority would be to engage the private sector, which holds great partnership potential due to its ability to leverage significant resources, skills and technologies, as well as to invest in research and development. So far, the sector’s participation on adaptation action has remained low due to several reasons, which should be addressed first.

A major one is that interventions for climate change adaptation and resilience building are not viewed as profitable, as they involve investments in natural resources such as land, water, forests and ecosystems, which are largely considered as public goods. The general absence of a business case demonstrating the costs, returns, viability and timelines, discourages private sector involvement in climate change adaptation financing.  

The challenge is not unique to Kenya. Between 2017-2018, only 1.6 per cent of global adaptation finance came from the private sector. Analysis by the Global Centre on Adaptation and the World Resources Institute has, however, demonstrated that investing in adaptation can yield high returns on investment in the long term, with benefit-cost ratios that range from 2:1 to 10:1, and even higher in some instances. The analysis also showed that investing US$1.8 trillion in early warning systems, climate resilient infrastructure, improved dryland agriculture, mangrove protection and resilience water resources between 2020 and 2030, had the potential to generate at least US$7.1 trillion in total net benefits in the long run.

Strong business cases

It is important to leverage on these findings to develop strong business cases to stimulate investments in climate adaptation projects. Without cost estimates, for example, strong investment proposals with clear revenue models cannot be developed for the private sector to analyse and engage in. NAFF would address this gap by developing a national register that provides detailed information of adaptation pipeline projects. As this pipeline is developed, a cost-benefit analysis would also be conducted to look beyond financial returns and also consider the social and environmental benefits that could significantly contribute towards sustainable and inclusive development.

NAFF could further explore implementation of innovative and long-term financing mechanisms for adaptation beyond concessional loans and grants, which currently constitute 52 per cent and 47 per cent of all adaptation finance respectively. Clearly, other relevant financial instruments such as equities, guarantees, resilience bonds, debt-for-climate swaps, adaptation benefits mechanisms and other risk-sharing facilities must be explored if the US$44 billion target for adaptation finance is to be met. For Kenya to scale up its adaptation financing needs, additional priority will also need to be given to mobilising and monitoring more domestic resources.

To operationalise NAFF, it could be nested within an existing national financing framework, such as the Kenya Climate Change Fund or through relevant domestic private sector associations such as the Kenya Bankers Association. NAFF could alternatively be nested within a new institutional arrangement between the Ministry of Finance and Ministry of Environment, with partners across various industries providing additional support through grants for technical assistance and capacity building. It would take less than a year set up NAFF and make it operational.

[Dr Somorin is the East Africa Regional Principal Officer for Climate Change and Green Growth at the African Development Bank, Nairobi]