Climate risk, resilience and adaptation

Adaptation finance 

The AfDB continues to exceed its target of parity between adaptation and mitigation finance, as per latest available figures from 2022, allocating 53% of climate finance toward adaptation, and the remaining 47% toward mitigation. The share of climate finance for adaptation has remained relatively consistent in recent years, having been at 63% in 2022, 67% in 2021, 63% in 2020, and previously below parity at 44% in 2019.  

In 2020, the AfDB became one of only two MDBs (of those assessed by E3G’s Public Banks Climate Tracker Matrix) to either achieve or exceed parity between adaptation and mitigation finance. It has still only been matched by the Islamic Development Bank in reaching this threshold. While in gross terms, total adaptation finance is still higher at institutions with larger resource endowments (e.g. the WBG, the IDB, and EIB), it is clear that the AfDB is jointly setting the standard among MDBs for the allocation of climate finance in this regard. The African Development Fund (ADF) Climate Action Window (CAW) is a strong example of the Bank continuing in this vein. Established in 2023 to accelerate and scale up climate finance access in low-income countries, the ADF CAW will allocate 75% of its resources toward adaptation.  

The Africa Adaptation Acceleration Programme (AAAP) is a particularly notable joint initiative between the AfDB and the Global Center on Adaptation (GCA). AAAP aims to mobilise USD 25 billion over five years by 2025. The AAAP is designed to be implemented through two instruments.  

1. AAAP Upstream Financing Facility: supporting project design and preparation to strengthen adaptation and resilience components of projects in the pipeline (including for other MDBs, Bilateral Development Banks, and Development Finance Institutions). Managed by the GCA, the AAAP Upstream Financing Facility supports the AfDB to prepare projects with strong adaptation and resilience components, supporting the Bank to leverage financing from international climate funds, in particular for large-scale transformative adaptation investments. 
2. Downstream financing, including from the African Development Fund (ADF) Climate Action Window (CAW): focusing on supporting innovative adaptation investments in ADF countries, through engaging new stakeholders and identifying high-impact scalable projects. This includes financing from the CAW (with USD 429 million in earmarked seed money, to mobilise up to USD 13 billion total across sources) of the concessional lending arm of the AfDB set up as part of the ADF 16 replenishment. 

The AfDB has also developed an innovative mechanism known as the Adaptation Benefit Mechanism (ABM). The ABM seeks to overcome the financial barriers to monetising adaptation activities and increase private sector uptake of the small-scale projects characteristic of the adaptation sector by credibly and transparently determining the financial support necessary to make an activity attractive to a developer. The idea is to use registered “Activity Design Documents” (for which technical assistance is provided to assist with drafting) as collaterals for loans, enabling otherwise unbankable entities to access credit and carry out projects. The ABM functions as a result-based financing programme, where the developer takes on the risk for delivering “Certified Adaptation Benefits” in order to receive payment.  

The ABM is currently being piloted by the AfDB, being used to finance a cold storage project for seed potatoes in Kenya. Key donors such as the United States have committed to supporting the mechanism, while other MDBs (including the EBRD) are in discussion with the AfDB over how the mechanism can be adapted to their own operations. 

Project level climate risk management procedure  

The AfDB released its Climate Risk Management and Adaptation Strategy (CRMA) in 2009. The strategy supports three areas of intervention:  

1. Climate-proofing investments: ensuring that all investments financed by the Bank are “climate-proof”, involving reduced vulnerability to climate variability through increased resilience. 
2. Policy, legal, and regulatory reforms: supporting Regional Member Countries (RMCs) to institute effective climate risk management and adaptation. 
3. Knowledge generation and capacity building: addressing the deficit in climate-relevant information and limited capacity that constrain the management of climate risks.  

The CRMA requires that Bank staff apply due diligence and climate risk management procedures throughout the project cycle according to the level of risk exposure. Its annex includes a matrix for categorising climate risk level. However, the associated procedures for each level are not laid out leaving the implications of categorisation unclear and posing a risk in terms of the consistency of the risk management procedures applied at each level. 

To put the objective of mainstreaming climate risk screening and adaptation set out in the CRMA into practice, the AfDB has since developed a Climate Safeguards System (CSS). The CSS is made up of four components:  

1. Climate screening: screening the vulnerability of project proposals to climate change and categorising them accordingly.  
2. Adaptation review and evaluation procedures (AREP): enabling developers to identify adaptation measures for projects based on their vulnerability categorisation. 
3. Country adaptation factsheets: producing general factsheets of climate projections and country indicators, independent from the climate adaptation screening process.  
4. CSS information base: an information portal with access to climate projections (including ones developed externally) and containing a database of information on adaptation usable across the other components. 

Based on a scorecard provided by the CSS, projects are allocated to either category one, two, or three, with category one projects requiring the most stringent measures, and so forth. Implementation of adaptation activities is only explicitly required for category one and two projects.  

The requirements for completing the climate screening for a project are not extensive, requiring “a good understanding of the project concept” but only “some understanding of the physical geography and climate of the host country” and with an explicit note that “no knowledge of climate change is required”. The requirements for completing AREP differ only in that “some knowledge of climate change” is required in this case. Not defining or requiring a higher level of expertise in climate change for completing climate screening has the potential to significantly undermine this approach.  

Notably, as part of the AREP for category one projects, consultation with either in-house climate change experts and/or external consultants is required. However, critically, their advice is not binding: the CSS states that “the Bank may have valid reasons for proceeding with the project, even if the Climate Change Experts advise against”. The CSS does not provide any further detail on what these “valid reasons” may be. Given the underlying incentives for projects to be approved, it is concerning that the advice of climate change experts or external consultants for category one projects can be disregarded on unspecified grounds. The cost–benefit analysis required for category one projects is also limited, being explicitly based only on a “crude estimate of the cost of the activity”, and no clear associated method for gauging benefit.   

The AfDB’s updated Integrated Safeguards System (ISS) further reinforces its climate risk screening framework, with climate risk screening explicitly mandated across “all projects, activities, and other initiatives”. The ISS sets out ten “Environmental and Social (E&S) Operational Safeguards” (OSs). OS1 requires both the assessment and management of climate risk and adaptation by the client throughout the entire project cycle. Under the ISS, borrowers are required to conduct an environmental and social (E&S) assessment of the project, including engagement with stakeholders. As part of this assessment, the following “mitigation hierarchy” is used:  

• Anticipate and avoid risks and negative impacts.  

• Where avoidance is not possible, minimise or reduce risks and impacts to acceptable levels.  

• Once risks and impacts have been minimised or reduced, mitigate them.  

• Where significant residual impacts remain, compensate for, or in the case of biodiversity and habitat losses, offset them, where technically and financially feasible.[1]

An Environmental and Social Management Plan (ESMP) must in turn be developed and implemented, followed by monitoring and reporting throughout the project cycle. As part of this, the ISS requires that AREP procedures identified by the CSS “should be mainstreamed into the project ESMP”. Clients are not permitted to carry out any activities related to the project that might have E&S risks until any measures required by the ESMP to comply with the AfDB’s OSs have been completed. This sequencing of requiring safeguarding measures to be in place before any related project activities commence represents a best practice approach among MDBs.   

Scope of coverage of project level climate risk management  

In the CRMA, the AfDB states its implementation will be “mainstreamed in all aspects of operations”. However, it then later states that “besides infrastructure, the CRMA will seek to climate proof investments in all climate-sensitive sectors such as roads, energy, agriculture, and natural resources management”. While this provides scope for the AfDB to apply the CRMA where it deems relevant, it falls short of a portfolio-wide project level climate proofing approach.  

As for the ISS, all 10 OSs “apply to all Bank Group’s funded operations regardless of the type and source of financing” (including technical assistance, whether associated with financing, or standalone). The CSS is in turn integrated into the ISS as the tool for climate risk screening, and therefore has the same scope. Climate screening and AREP under the CSS are carried out at the project identification or preparation stage only. 

Enhancing client climate resilience  

OS1 of the updated ISS applies to all programme-based operations and associated subprojects, as well as lending to or investing in financial intermediaries. Short-term exceptional circumstances such as emergency relief are exempt, although any further detail on what kind of activities fall into this category is not forthcoming. Furthermore, “associated facilities” (activities not directly funded by the Bank but which are a requirement for the project that is being financed by the Bank) are also covered, to the extent that clients have influence over these. Influence is determined on a case-by-case basis, with borrowers required to demonstrate the extent to which they can or cannot exercise control or influence over associated facilities, including details on financial, legal, regulatory, and institutional factors. 

The ISS does include provisions for the AfDB to utilise the client’s environmental and social framework. However, in any such cases the AfDB is first required to review this framework and identify any necessary measures to address gaps in the client’s framework, including addressing capacity issues.  

Separate to Bank policy, the AfDB and African Risk Capacity Agency (ARC) are jointly aiming to enhance risk management infrastructure and policy across Africa (while supporting countries in building resilience against climate shocks) through the Africa Disaster Risk Financing (ADRiFi) programme. ADRiFi was initially set up to run from 2019 to 2023 but has been extended in some locations (and received additional financing) for a second phase, from 2024 to 2025. The programme aims to support countries in improving the management of natural disaster risk by:  

1. Capacity building: strengthening countries’ capacity to evaluate climate-related risks and costs and elaborating mitigation measures at national and subnational levels.  
2. Rapid response funding: providing funding to facilitate rapid response, including disbursement of emergency funds, to address climate disasters at national and local levels. 

Recommendations:  

• The AfDB should provide more detail regarding the mitigation hierarchy for E&S assessments, such as by defining what “acceptable levels” mean for risks and impacts. This should include setting out the decision-making process when “significant” residual impacts remain, and compensation or offsetting is not deemed financially or technically feasible.  

• The AfDB should strengthen the requirements for conducting climate screening under its CSS to ensure there is sufficient expertise for effective implementation in all cases. For example, the AfDB could strengthen the existing procedure for seeking advice from in-house climate change experts and/or external consultants on category one projects by making any recommendations received from this consultation binding by default. In line with this, the Bank should clearly set out the scope of the “valid reasons” under which the advice of climate change specialists against a project classified as category one under the AREP can be overruled.  

• The AfDB should extend application of its climate screening processes under the CRMA across its full portfolio (in line with its statement that it is to be “mainstreamed in all aspects of operations”), rather than limit this to perceived “climate-sensitive sectors such as roads, energy, agriculture, and natural resources management”. This should reflect the understanding that climate change impacts can be felt across a considerably wider range of sectors and activities than those identified, such as notably in the broader transport sector and the urban development sector, among others.   

• The AfDB should clarify its role with regard to strengthening clients’ E&S framework when this is deemed insufficient. Beyond identifying gaps in a given client’s framework as a first step, the Bank should also commit to jointly developing a revision strategy and supporting clients with tackling these shortcomings in order to enable operations to go ahead.  
• In view of resource constraints, it is vital that available adaptation finance is allocated according to a robust assessment of national adaptation priorities. Accordingly, the AfDB should consider developing targeted support for National Adaptation Plans, to enable adaptation finance and associated technical support to be grounded in a country-led and comprehensive understanding of adaptation needs. Such an approach would also align well with moving towards programmatic forms of country level engagement, as opposed to on a project-by-project basis.  

[1] To be practically viable as a last resort, offsetting procedures must be robustly defined and verified by third parties, in view of the significant negative impacts (in terms of biodiversity and habitat loss, as well as associated emissions) that may result if ineffective.