Gaps in adaptation taxonomies hinder climate finance in Asia: report

Key takeaways

• An new report from the Institute for Energy Economics and Financial Analysis shows that weak and inconsistent criteria within Asian taxonomies are severely constraining the flow of climate finance, contributing to a massive funding gap.
• Integration of adaptation measures is uneven across the region: Hong Kong is pioneering with sector-specific rules, while China and Vietnam make no reference to climate adaptation in their national frameworks.
• The IEEFA report recommends that south-east Asian economies use innovative capital markets solutions, such as resilience bonds and debt-for-nature swaps, to attract private capital and address urgent adaptation needs.

Without clearer criteria and metrics in adaptation taxonomies, Asia risks widening its climate financing gap, warns a new report by the Institute for Energy Economics and Financial Analysis (IEEFA).

While the region remains highly exposed to climate shocks and is chronically underinsured, adaptation finance continues to fall far short. Between 2021 and 2022, less than 8% of the US$431bn needed annually for climate resilience was met, according to the Climate Policy Initiative.

Embedding adaptation into taxonomies with clear guidelines and standardised metrics could reinforce the financial case for investments into climate resilience, said IEEFA.

“The dominant perception that adaptation benefits are ‘hard to measure’ continues to constrain investment, despite evidence that adaptation projects can deliver attractive economic rates of return when full benefits are counted,” it wrote.

While adaptation is recognised as an environmental objective in most Asian taxonomies, its classification relies on vague or qualitative guidelines, lacking the detailed technical screening criteria and thresholds that typically apply to mitigation activities.

“This ambiguity limits clarity on what qualifies as a climate change adaptation activity and reflects the inherent challenge of developing quantitative, context-specific adaptation metrics,” the report states.

Last month, Hong Kong became one of the world’s first jurisdictions to integrate adaptation into its taxonomy, starting with the water sector. In its pilot phase, the country will rely on a whitelist approach, where adapting measures can be automatically deemed eligible without the need to meet specific criteria. There are future plans to include technical specification checks and specific thresholds, as recommended by the Climate Bonds Initiative’s resilience taxonomy.

In Singapore, Malaysia, Philippines and Indonesia, an economic activity can qualify for the adaptation label if its implemented measures increase the resilience of other stakeholders, on top of its own. In particular, Singapore requires the activity to “not adversely affect adaptation efforts by others”.

Out of the 10 countries assessed by IEEFA, China and Vietnam are currently the only two  that make no reference to climate adaptation activities in their taxonomies.

At the regional level, the Association of Southeast Nations (Asean) is in the process of integrating adaptation requirements into its taxonomy.

“If designed comprehensively, [the Asean taxonomy] can clarify and ease the flow of finance into adaptation projects in the region, while serving as an example for other regional taxonomies,” the report states.

Last November, the regional bloc released a white paper introducing six key principles to ensure that adaptation criteria are science-based and context-specific.

Resilience bonds and debt-for-nature swaps

With existing fiscal constraints and reductions in official development assistance, south-east Asia should consider using capital markets or innovative financing mechanisms, like debt-for-nature swaps, to meet its adaptation needs, IEEFA has suggested.

Adaptation and resilience bonds, while nascent in the region, have gained traction in developed markets and seen strong investor demand.

Last year, the Tokyo Metropolitan Government issued the world’s first certified resilience bond to boost its flood defences. The €300mn ($353mn) issuance was oversubscribed seven times – attracting €2.2bn in bids from nearly 120 institutional investors.

The report’s authors said that Japan’s example offers a replicable model for scaling adaptation finance for south-east Asian countries by leveraging internationally recognised standards to enhance credibility and attractiveness for global investors.

“When combined with development bank credit enhancements or guarantees – particularly for countries with weaker sovereign ratings – such instruments can provide a practical pathway to attract private capital and finance priority climate resilience projects,” they wrote.

For cash-strapped countries, IEEFA recommends the use of debt-for-nature swaps, an instrument that promises to provide debt relief while funnelling private capital into local conservation, have increased in pace and scale in the past few years.

In 2015, Seychelles launched the world’s first debt-for-nature swap for marine conservation, which restructured $21.6mn of the country’s debt. The savings from converting its debt to lower-interest financing were directed towards marine conservation and climate adaptation projects.

Within the Asean bloc, Indonesia and the Philippines have also raised up to $30mn and $40mn respectively through several debt-for-nature transactions, primarily led by the US government.

However, researchers have found that the Seychelles’ deal – brokered by the Nature Conservancy – did not reduce its indebtedness, nor did the swap secure environmental protections beyond prior commitments made by the government. The Climate Action Network, a coalition of over 1,900 civil society organisations, has also previously criticised debt-for-nature swaps as an inadequate solution for the debt and climate crises in the global south.

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