Quiz | Innovative Financial Instruments for Climate Change Adaptation

You got it. Climate Resilience Bonds dedicate a portion or all of the proceeds of the bond issuance to investments that support climate change adaptation and resilience-related assets and activities. The issuer of the bond must demonstrate that they understand the climate risks and how the activity or project addresses those risks. This is an emerging instrument, with the first climate resilience bond launched by the European Bank Reconstruction and Development in 2019.

You’re right that Blue Bonds can support projects and activities with adaptation benefits, such as coastal climate resilience and mangrove rehabilitation, but they are focused on the betterment of marine resources. The first blue bond was issued by the Government of the Seychelles in 2018, and the most common objective to date is the financing of marine and ocean projects.

Yes. Sustainability-linked bonds are linked to the issuer’s achievement of climate change or broader sustainability goals through adjustments in general operations, rather than being earmarked for financing particular projects. They have typically been used by corporations to further their overall sustainability strategies and can be used to finance climate change adaptation projects, such as flood protection.

Not exactly. Sustainability bonds are a type of green bond where the proceeds are applied to financing specific green and social projects, rather than being used for the general purposes of a firm. These use-of-proceeds sustainability bonds offer flexibility in regard to the types of projects to finance, and can be used for climate change adaptation projects, such as management of coastal areas, flood management, and sustainable management of natural resources.

Correct. Payments for ecosystem services have been used as a conservation and resource management tool since the early 1990s and have been implemented on all continents. They use a “beneficiary pay principle” to transfer payments to providers that are linked to the successful protection of ecosystem services. These schemes can be structured to provide adaptation benefits, such as flood abatement.

Not quite. Conservation impact bonds are an emerging instrument, with a prototype launched in Canada in 2020. They provide funds for conservation and nature-based solutions, and can be structured to provide adaptation benefits, such as restoring waterways and growing native plants.

Both are correct. Credit Guarantees are an instrument whereby a third party – the guarantor – pledges to repay all or part of a loan if the borrower defaults. Guarantees in developing countries are most popular in structuring financing in which a multilateral development bank, bilateral development partner, or government entity guarantees the repayment of a loan taken by a project developer. Guarantees can be helpful in raising investment for adaptation projects that have less of a track record and are unfamiliar to investors, or adaptation projects that are predicted to have lower or more volatile returns on investment.

Both are correct. Pooled Investment Funds are financial vehicles that combine capital from different entities and then deploy that capital to projects/initiatives. When public funds (e.g., from multilateral development banks, bilateral development partners, and government entities) are combined with private finance, the resulting pool of resources is a blended finance investment fund. The public funds help to lower the risk/return trade-off for other co-investors, which helps to attract private investment to projects that otherwise would not have receive commercial capital, such as adaptation projects.

You’re right. The Government of Peru devised the Works for Taxes Scheme in 2008 to encourage joint work between the public and private sectors to reduce the country’s infrastructure gap. The private companies assume the upfront costs of new infrastructure projects while the government accepts the projects in lieu of future tax payments. Colombia replicated the program in 2017 and included climate change and climate risk management as one of the priority areas for project development.

No. Tax Increment Financing (TIF) has been used for over 50 years by municipal governments in the United States, with some application in Australia, Canada, Hong Kong, New Zealand, and the United Kingdom. TIF schemes are a form of land value capture financing, where it is assumed that land value will increase as a result of redevelopment or revitalization of public infrastructure projects that are financed by municipal governments.  The expectation is that, after completion, the taxation authority will receive higher tax revenue as a result of an increase in land values. This incentive mechanism has been used to encourage investments in adaptation, including green roofs and stormwater management.

Correct. Environmental Impact Bonds are used to pilot riskier investments or to scale up solutions that have been tested in a pilot project. Borrowers, such as public entities, repay investors based on the achievement (or not) of agreed environmental outcomes, meaning that the borrower could repay more or less than the original amount of the loan depending on the results, as defined in the environmental impact bond contract These bonds tie repayment to the revenue or cost savings generated by the successful project, while traditional bonds are often repaid from the general revenue of the bond issuer. Environmental impact bonds can be useful in cases where a project delivers climate change adaptation benefits, such as wildfire risk reduction and stormwater management, but lacks traditional revenue streams to attract investors interested in both a financial return and environmental impact. 

No. Green Bonds, like traditional bonds, are typically used for multiple investments and are repaid with the general revenues of the issuer of the bond. A core component of a green bond is the use of its proceeds for projects with clear environmental benefits that should be assessed, and where possible, quantified by the bond issuer. Climate change adaptation is an eligible project category under the Green Bond Principles.

You’re right. Crowdfunding and investment platforms aggregate capital from multiple investors (small private investors, investment funds, donors—each of whom provides a relatively small amount of money) and channel the capital into multiple projects and businesses seeking investment, which can include adaptation projects. Project selection (eligible borrowers), risk assessment, and due diligence are done by the crowdfunding platform provider or a partner company. These platforms typically operate as an Internet-based platform and often function without standard financial intermediaries. 

Not exactly. Green Revolving Funds are typically established with funding from   public sources and provide funding for sustainability projects that generate cost savings. A portion of the savings is used to replenish the fund, which ensures a repeated cycle of loans and repayments. Several U.S. states have used these to finance adaptation-related projects, including stormwater infrastructure; and revolving funds have been used to support small projects in developing countries including for adaptation.