Climate Resilience and Adaptation Finance & Technology Transfer Facility (CRAFT)

There is an urgent need to spur greater investment into climate adaptation and resilience, particularly by the private sector. The 2016 UNEP Adaptation Gap report estimates that adapting to climate change in developing countries could cost between USD 280 and USD 500 billion per year by 2050. Despite these rising costs, actual investments in climate adaptation lag. In 2014, only USD 27 billion was invested in climate adaption activities – around 7 percent of total climate-related investment. While this is only a rough estimate due to a lack of information on domestic and private resilience investments, current investments clearly constitute only a fraction of what is needed to avoid costly and catastrophic future impacts.

However, investment into climate adaptation and resilience requires an understanding of climate vulnerability, as well as the availability of effective solutions to manage exposure and build resilience, both of which are currently lacking across the market. Furthermore, where solutions do exist they are often not being “matched” to market needs. This can be caused by a lack of company awareness of adaptation as a sector or a need, whereby a relevant product isn’t targeted into the adaptation space. Still, even in instances where there may be awareness of the market opportunity, the organization may not have the operating or financial capacity to expand.

Therefore, there is a significant opportunity to scale-up investment in adaptation and resilience by investing financial and intellectual capital into companies that already have climate risk analysis capabilities or offer products and solutions to increase resilience. More specifically, investment is needed to bring existing technologies and solutions to new sectors and geographies.

The Climate Resilience and Adaptation Finance & Technology Transfer Facility (CRAFT) being developed by the Lightsmith Group will be the first dedicated commercial investment vehicle to focus on expanding the availability of technologies and solutions for climate adaptation and resilience. To do so, CRAFT will blend commercial and concessional capital into a private equity fund that invests growth capital, including strategic support into 10-20 companies already offering climate intelligence products and solutions, but may not have visibility on the market potential or operational capacity to expand on their own. In addition, a technology transfer mechanism is planned to support the transfer of technologies and solutions to developing countries.

CRAFT will invest growth equity in companies to expand the availability of climate intelligence products and solutions, and to help transfer technology from developed to developing countries.   

CRAFT will aid the diffusion of both climate intelligence products and solutions for building resilience in developed and developing countries. It will enable a diverse set of stakeholders to pool their finance and expertise, with $1 of blended concessional finance catalyzing up to $4 of commercial capital.  Sponsor engagement enabled through active investment positions in portfolio companies, together with CRAFT’s technology transfer mechanism, will mutually reinforce one another to drive deployment of technologies and solutions for climate adaptation and resilience globally.

Design

CRAFT graphic

Through CRAFT, a private investor sponsor will form an investment vehicle, targeting USD 500 million. Of this total, CRAFT will aim to raise USD 100 million in catalytic capital from public and private donors, as well as philanthropies to catalyze USD 400 million in commercial capital. Commercial investment by DFIs will serve as an anchor to additional investment by impact investors, institutional investors, endowments, and family offices.

The sponsor will use this capital to make growth investments into 10-20 companies that deploy technologies and services to analyze physical climate risk (i.e. weather analytics, catastrophe bond modeling, resilience consulting, and other approaches), and offer products and solutions that address adaptation needs in water, agriculture, health, energy, and other key sectors.  There will also be technical assistance provided to support technology transfer from developed countries to developing countries.

A key feature of CRAFT is its intent to catalyze $4 of commercial investment for every $1 of catalytic capital. Key components of CRAFT’s overarching strategy to attract this private investment are to:

  • Pursue a well-understood, well-balanced risk-return growth strategy, targeting 20-25% gross returns.
  • Deploy public finance to de-risk investments, allocating 20% of concessional resources to reduce perceived and real risks to commercial investors.
  • Employ a fund manager with a strong track record in private growth capital and expertise in both developed and developing country investment.