Good practices in accessing and delivering adaptation finance to support Small Island Developing States and Least Developed Countries

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Introduction

Adaptation finance is central to action on climate change, yet there are continuing problems with ensuring that it reaches the people and places it is needed most. Small Island Developing States (SIDS) and Least Developed Countries (LDCs) are among the world’s most climate-vulnerable countries. However, they face challenges not only in securing sufficient financing to address the now-unavoidable impacts of climate change, but also in accessing high-quality, equitable finance that supports their self-determined needs and priorities. Equitable finance, coupled with robust strategy and planning, is crucial to these countries addressing their unique risks and vulnerabilities and implementing effective adaptation strategies, according to their self-determined priorities.

The next two to three years are critical to transforming how adaptation finance is delivered, and it is vital to better understand and learn from current approaches to inform these much-needed changes. In June 2023 the LDC Group on Climate Change, the Alliance of Small Island States (AOSIS) and the Champions Group on Adaptation Finance (CGAF) jointly called for an evidence review of effective adaptation finance practices from the perspective of both the fund provider and recipient — a unique and often missing perspective on what is and is not working across the full finance pipeline.

The article outlines strategies and innovative practices to enhance access to and delivery of adaptation finance for SIDS and LDCs, emphasizing the importance of equitable, country-led mechanisms and innovative financing approaches to address climate vulnerabilities effectively.

Methodology

This report and its recommendations are based on seven case studies and more than 12 months of surveys, interviews and analysis with country representatives and experts from the LDC Group, AOSIS and CGAF. While some of the case studies are still in early stages and have obtained limited hard evidence, initial findings are promising and are thus included in this review.

Key insights: What does the evidence reveal?

The following eight key insights summarize the main findings of this evidence review.

1. Adopting programmatic financing and improving national co-ordination can effectively reduce transaction costs: Moving from project-based to programmatic financing enhances the efficiency of climate finance by streamlining delivery, reducing transaction costs, minimizing disbursement delays and aligning investments with national priorities such as national adaptation plans (NAPs) and nationally determined contributions (NDCs). Pooling adaptation funds, implementing robust national co-ordination mechanisms through a whole-of-government approach, and ensuring continuity and budgetary support to do so can ensure adequate and predictable financing for SIDS and LDCs.
2. Strengthening and supporting country-level planning and budgeting systems improves readiness to utilize funds effectively: Early investments by finance providers and recipients in strengthening country systems and capacities significantly boost both access to and effectiveness of adaptation finance. Enhancing finance ministries’ ability to collaborate across ministries on climate change, integrate climate considerations into risk assessments and move beyond conventional approaches can improve countries’ readiness to utilise funds effectively. For true mainstreaming, finance ministries must be central to the process and can help develop ‘bankable’ projects aligned with nationally determined and owned investment strategies.
3. Accelerating efforts to mobilize innovative finance from all sources is crucial to scaling up adaptation finance: Mobilizing innovative finance mechanisms such as private financing from domestic and international sources, blended financing, and that from non-traditional sources is crucial for scaling up adaptation finance. Public finance alone cannot meet the growing adaptation needs of SIDS and LDCs. Pooling investments helps mitigate risks associated with these approaches. However, focusing excessively on new solutions can undermine effectiveness. Balancing proven methods and domestic expertise with targeted investments can support innovation, enhance resilience and deliver better results.
4. Substantially improving transparency and replicability in climate finance delivery enhances effectiveness and builds trust: Increased transparency in the quantity and quality of climate finance to LDCs and SIDS is essential for building trust, identifying successful approaches and enabling their replication and scaling. Yielding measurable progress towards recipient countries’ climate and development goals ensures that resources are used efficiently, outcomes are monitored and commitments are met. This transparency supports systematic learning and the adaptation of best practices across similar contexts and regions.
5. Urgently addressing finance access and equity challenges is crucial to ensuring funds reach the most climate vulnerable: The challenge for vulnerable countries is not only the quantity of finance but also the quality of finance delivered and equity in finance distribution. To enhance the quality and equity of adaptation finance, it is crucial to review application procedures from the recipients’ perspective rather than imposing rigid processes from those providing the finance. A shared vision and collaborative effort between finance providers and recipients are needed to ensure that funds are designed by and effectively reach the most climate-vulnerable countries and communities.
6. Strengthening peer-to-peer learning and knowledge- sharing platforms at all levels builds capacity and enhances scalability of best practices: Strengthening peer-to-peer learning at all levels and providing resources to support people and teams to dedicate time to these processes are both crucial for building capacity and sharing best practices in adaptation finance. These practices can enhance national and regional capacities in SIDS and LDCs, while dedicated staffing ensures that relevant government and other financing entities can fully utilise these opportunities to scale and replicate successful climate adaptation strategies.
7. Expediting the enabling environment for corporate, private and philanthropic contributions can diversify access to finance: Proactive measures by finance providers to create an enabling environment for corporate and philanthropic contributions can enhance and diversify access to climate finance in vulnerable countries. Effective regulatory frameworks and incentives can further encourage private sector investment in climate resilience. Unlocking the role of domestic and local private entities, such as social enterprises, can support the sustainability of local solutions.
8. Scaling up finance for country-led mechanisms that devolve funds enhances equality and equity in finance access: Scaling up and pooling finance to support country-led delivery mechanisms can channel climate finance directly to local communities and bolster local planning through participatory approaches tailored to local systems. Effectiveness and equity are enhanced when these mechanisms foster mutual trust, accountability, transparency and alignment with national and local priorities, and help to advance the Principles of Locally Led Adaptation (LLA).

Recommendations

Outlined below are recommendations for donors or finance providers and recipient countries to help scale up and improve access to adequate and equitable adaptation finance for SIDS and LDCs. These recommendations are based on the evidence set out in the following sections.

Donors/finance providers

1. Deliver more and predictable climate finance from diverse sources into country-owned platforms like national funds to reduce transaction costs, enhance co-ordination, and align with national priorities and plans (for example NAPs and NDCs). This finance should provide immediate, flexible support while balancing short-term and long-term needs. Multilateral funds channelled through multilateral development banks (MDBs) alongside bilateral funds need to increase contributions towards adaptation to meet the growing needs of SIDS and LDCs.
2. Provide long-term support to strengthen policy, planning, budgetary and financial systems in LDCs and SIDS according to their needs, to improve the absorption and equitable delivery of adaptation finance.
3. Streamline application and reporting procedures across all forms of climate finance to expedite disbursement to SIDS and LDCs, ensuring ease for recipients while maintaining trust and accountability, rather than adhering to rigid donor-driven processes.
4. Scale up and deliver larger and more predictable amounts of finance specifically for local action that is aligned to the principles for locally led adaptation, including through country-led mechanisms. For this to succeed, donors need to streamline application processes for local actors, engaging them as leaders in adaptation initiatives, and employing innovative technologies and financing methods tailored to local needs.
5. Minimize the risk to private finance providers by pooling their investment. Novel financing approaches such as national-level private sector investment facilities for green investments are potentially risky, since they do not yet have a proven track record in LDCs and SIDS. By pooling finance, finance providers can demonstrate commitment to the approach, without over-leveraging themselves and risking high losses on their capital investment.

Recipient countries

1. Strengthen national capacities including long-term policy, planning, budgetary and regulatory systems to ensure strong country ownership and engagement and support for local-level climate action.
2. Establish robust national funding platforms capable of co-ordinating and accessing diverse sources of climate finance, supported by capacity building and training to help local institutions manage and understand climate financing and reporting requirements.
3. Support piloting innovative approaches to scale up national adaptation finance, reducing access times, lowering transaction costs, simplifying compliance and enabling direct financial flows to vulnerable communities.
4. Strengthen the capacity of all line ministries, especially finance ministries, to integrate climate considerations into risk assessments and move beyond conventional approaches. By centralising finance ministries within the process, countries can better utilise funds and develop ‘bankable’ projects aligned with national investment strategies.
5. Create an enabling environment for businesses, investors and philanthropists to contribute towards the cost of adaptation in developing countries. This can be achieved by adapting future regulations to facilitate investments and encouraging a balanced approach to both adaptation and mitigation, by clearly defining national adaptation needs and providing an institutional mechanism to issue letters of approval for adaptation projects while removing unnecessary bureaucratic barriers that may exist.

Both donors/finance providers and recipients

1. Early investments in national institutions are needed to support the strengthening of country systems and capacities to improve access. For example, investing in public financial management (PFM) systems can demonstrate a country’s readiness for more funding in the future.
2. Establish peer-to-peer learning platforms for learning at all levels (national, regional and international) to improve transparency, scalability and replication of successful adaptation finance practices.
3. Explore and agree on mechanisms to attract innovative and blended financing to stimulate domestic enterprises, including debt swaps, and enhance adaptation finance delivery. LDCs and SIDS with strong private sectors, national climate funds and development finance institutions (DFIs) could explore green financing facilities.
4. Create incentives, such as progressive tax policies and patient finance structures, to build resilient local enterprises, attracting private investment in adaptation while easing loan burdens on LDCs and SIDS.
5. Build evidence to demonstrate the viability of private finance facilities for adaptation, particularly in LDCs and SIDS, addressing the challenge of finding suitable business models for private investors to be able to make a financial return on adaptation investments.

Suggested citation

Hassan, A, Regmi, B, Steinbach, D, Acuda, A, Holland, E, Johnstone, K, Gul, M and Patel, S (2024) Evidence report: Good practices in accessing and delivering adaptation finance to support Small Island Developing States and Least Developed Countries.