Welcome back to Clickable Insights. Today’s newsletter discusses ways to engage private climate financing for adaptation across Southeast Asia, a partnership in Vietnam showing how banks and development organizations can improve credit access for coffee exporters, and the troubled carbon farming service industry.
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How to Successfully Finance Climate Adaptation
According to the Climate Policy Initiative, global climate finance hit nearly US$1.3 trillion across the 2021-2022 period, nearly doubling the previous two years.
However, this is largely driven by financing for mitigation, which accounted for US$1.15 trillion of that figure. Meanwhile, the limited adaptation financing that does exist comes almost entirely from the public sector – 98%, to be precise.
In that context, UKAid and Oxford Policy Management recently published a report seeking to answer an important question: how can private investment in adaptation be scaled up across Southeast Asia?
Adaptation is critical for countries in the region, some of which – including Vietnam and the Philippines – are among the most vulnerable to climate impacts in the world.
However, the governments of these countries cannot afford to take on the costs of adaptation alone – nor should they. At the same time, as the report’s authors note, “the opportunity presented by private investment in adaptation in Southeast Asia has received relatively little attention, particularly as compared to mitigation solutions.”
Innovative new financial mechanisms like green bonds and climate risk insurance are making it easier to mobilize private capital for climate adaptation and resilience. However, these are still in their early stages.
The report identifies 10 case studies offering a potential model for replication or scaling up elsewhere in Southeast Asia, including three in Cambodia, two in each of Vietnam, the Philippines, and Indonesia, and one covering multiple countries.
Through these case studies, the authors highlighted eight recommendations to accelerate private investment in climate adaptation in Southeast Asia:
Governments should make better data on physical climate risks available to companies and other stakeholders
Countries should set out investment plans linked to their nationally determined contribution (NDC) and identify priorities for investment.
Strengthen the investment climate, especially in less developed countries
Provide support for pipeline development
Develop blended finance capacity and continue to support risk mitigation facilities
Work through national development banks and local commercial banks
Utilize technology
Taxonomies and standards can help to create private sector markets
We believe the first and sixth are particularly relevant to Vietnam, where agriculture is a significant portion of the economy. The health of this sector is heavily dependent on climate, meaning those involved need good data on potential risks. Farmers, meanwhile, are key players in the value chain, but they have limited access to finance, an issue that could be rectified in part by local commercial banks who know the market.
The IFC – VPBank Partnership
While not a precise example of one such partnership, a loan delivered by VPBank and the IFC illustrates how development organizations can pave the way for further credit access.
IFC previously signed an agreement with HDBank in 2022 to provide supply chain financing for SMEs in Vietnam.
At that time, an HDBank executive said: “Supply chain financing that links buyers, suppliers, and financial institutions will efficiently support the trade cycles. IFC's timely support will enable local businesses to leverage emerging trade opportunities and improve their linkages to formal supply chains, contributing to Vietnam's economic growth."
This July, IFC and VPBank announced a supply chain financing package worth up to US$150 million for coffee exporters in Vietnam. This extends a long-running partnership between the two financial institutions, and other programs intended to benefit farmers are expected in the future.
By partnering with VPBank and IFC, exporters can access financing tailored to the export market and overcome cash flow constraints linked to international transactions and DAP (Delivered At Place) payment terms.
Under a DAP agreement, the exporter is responsible for delivering goods to a specified location, covering all costs and risks up to that point, including transportation and insurance. Payment, therefore, doesn’t take place until a coffee shipment is received. This loan program gives coffee export businesses capital to cover the gap between production and delivery.
VPBank offers preferential financing packages to coffee SMEs with favorable interest rates and credit conditions. Alongside risk-sharing, IFC also provides technical support in connecting local suppliers and large buyers, including major coffee importers.
According to “Trade Finance in the Mekong Region,” a report published by IFC and the World Trade Organization in late 2023, increasing trade finance at reasonable borrowing costs could help increase Vietnam’s import and export turnover by 6% and 9%, respectively.
This approach enables Vietnamese coffee exporters to build stronger relationships with international buyers, meet global trade standards, and ultimately enhance their participation in the global value chain.
Rice Carbon Project Development Challenges
In the first half of 2024, agriculture and forestry carbon farming service companies raised just US$10 million globally, compared to US$100 million in the same period last year.
According to AgFunder News, these businesses “support farmers and foresters in adopting sustainable and regenerative practices that sequester and store carbon, earning them carbon credits to trade on the voluntary carbon market.”
One problem, according to a 2024 Purdue survey, is low ROI, presenting a major barrier. Only 8% of respondents said they had discussed carbon capture and contracts with companies. As a result, agricultural carbon credits account for just over 1% of total carbon credits issued.
Other structural issues confront the industry, such as the challenge of long-term storage: Agricultural practices may only store carbon temporarily, for example in soil or vegetation. Changes in land use, climate, or management practices could reverse carbon sequestration over time.
The math can also be difficult for farmers, perhaps leading to reduced demand from that side of the carbon equation.
For example, say 1 hectare of rice grown in the Mekong Delta through AWD (alternate wetting and drying) generates an additional US$60 per harvest. At two or three harvests annually, that’s US$180 maximum per year.
Monitoring, Reporting, and Verifying (MRV) is an additional cost, while project developers take a cut and farmers may be last in line, potentially earning less than VND 4 million in a year from selling carbon credits.
Carrying out MRV across numerous small plots is costly and technically challenging, further limiting the direct benefits to farmers. Regional countries are working to address these problems, however.
For example, the high-profile project to develop one million hectares of high-quality rice in the Mekong Delta is moving into the implementation phase. We hope that such challenges can be overcome through economies of scale and that farmers will be justly rewarded for making the switch to AWD production.
Clickable Insights is brought to you by Clickable Impact
Clickable Impact is an Asia-based consultancy committed to climate action and sustainable development. We have three practice areas: public affairs and communications, sustainable tourism, and transformative innovation. Across our work, Clickable Impact favors projects that urgently mobilize private sector engagement, policy action, and investment.
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