From Mitigation to Resilience: Why Local Adaptation Funds Are the Next Frontier of Urban Climate Finance

Co-authored by Rupesh Madlani, Àlvar Gener, Delphine Queniart, Lisa Engelen, Stephanie Willcocks, and Diana Espada at Bankers without Boundaries, and Thomas Osdoba at NetZeroCities 

A year ago, we wrote about the urgent need to unlock urban climate finance and argued that local city funds could help cities move from aspiration to implementation on the net zero transition. Since then, the BwB team has been putting that thesis into practice, working with a growing number of European cities to design and launch local investment vehicles – translating the argument we made into a live pipeline of mandates across the continent. But even as that work has accelerated, the terrain has shifted. As climate impacts arrive faster than emissions reductions, a second, arguably more pressing, financing challenge has come into sharp focus: adaptation. 

Cities are where the climate crisis is experienced most directly – through heatwaves, flooding, water stress, storm damage, and the disruption of the infrastructure on which urban life depends. Mitigation remains essential, but adaptation is now unavoidable. The question is no longer whether cities need to adapt, but how they will pay for it – and whether the financial, institutional, and political architecture exists to let them act at the speed and scale required. 

This article is written with three audiences in mind. For city leaders, who are the principal agents in this story, it sets out why establishing the right financial vehicles – backed by the right decision-making structures – will be central to delivering on adaptation. For investors, it argues that resilience is the next major frontier for capital deployment, and that cities, with the right intermediation, are credible partners. And for policymakers at national and European levels, it makes the case that local action will only scale if the enabling environment – instruments, governance frameworks, and concessional support – evolves in step. 

The Adaptation Finance Gap: A Bigger Challenge, A Bigger Opportunity 

The numbers are stark. According to the UNEP’s 2025 Adaptation Gap Report, developing countries will need an estimated US$310–365 billion a year for adaptation by 2035. Yet, international public finance flows into adaptation were just US$26 billion in 2023, having actually declined from the previous year – 12 to 14 times smaller than what is needed. Indeed, adjusted for inflation, the real financing need could be as much as US$440–520 billion a year by 2035.^[1] 

The adaptation finance challenge, measured as a multiple of current flows, is proportionally far larger than the mitigation finance challenge. And unlike mitigation, where returns on investment are increasingly well understood and priced by capital markets, adaptation has suffered from a structural disadvantage: its benefits are often diffuse, difficult to monetise, and accrue over long horizons to public goods such as flood defences, cooling infrastructure, and water resilience. 

However, this is precisely why adaptation is also the bigger opportunity. Mitigation markets have matured. Renewable energy is bankable. Electric vehicle infrastructure is attracting institutional capital. Adaptation, by contrast, is roughly where mitigation was 15 years ago – underpriced, underfinanced, and ripe for the kind of market-building work that transformed clean energy. For investors willing to engage early, the prize is not just exposure to a financing gap; it is participation in the formation of an entirely new asset class centred on resilience. 

Why Adaptation Is Structurally Harder to Finance 

Three features of adaptation make it harder to finance than mitigation, and understanding these is the starting point for designing the right vehicles: 

• Benefits are often avoided losses, not new revenues. A sea wall or a drainage upgrade protects against damages that would otherwise occur. Quantifying that value requires credible climate risk modelling, and translating it into an investable cash flow requires either public commitment (e.g., availability payments, resilience credits) or market mechanisms (e.g., insurance linkages, value-capture structures). Most cities lack the capacity to do either on their own, and value capture and resilience credit markets are still very nascent. 

  
  

• Adaptation is inherently local. Unlike a solar farm, whose economics travel, a flood resilience project in City A will generally look nothing like one in City B. This fragmentation makes aggregation – the process by which small projects become investible portfolios – significantly harder and raises transaction costs for private investors. 

  
  

• Public goods dominate. UNEP estimates that roughly three-quarters of national adaptation activities identified in Nationally Determined Contributions and national adaptation plans are public goods: flood protection, early warning systems, ecosystem-based defences, social protection. These cannot be privatised – but they can be co-financed if the right blended structures and de-risking instruments are in place. UNEP puts the realistic private sector contribution at around US$50 billion per year – 10 times current private capital flows of around US$5 billion,^[2] but still far short of the need. 

  
  

These features are not reasons to retreat from the challenge. They are the design brief for the next generation of financial vehicles. 

The Role of a Fund: Industrialising the Structuring Work 

Given those structural barriers, it would be easy to conclude that the answer is simply ‘more capital’. But capital alone, without the structures to absorb it, will not find its way to credible adaptation projects. The role of a fund – whether local, regional, or European – is not to substitute for project-level work, but to industrialise it. 

Concretely, a well-designed adaptation fund does three things that individual cities and individual investors cannot commonly do at scale on their own: 

• It engineers cash flows from avoided losses. By embedding climate risk modelling, insurance-linked structuring, and resilience credit design within a single platform, a fund converts the diffuse public-good benefits of adaptation into measurable, contractible flows that capital markets can price. Cities cannot reasonably build this capability project by project; a fund concentrates it. 

  
  

• It aggregates fragmented local projects into investible portfolios. The transaction costs of due diligence on a single municipal drainage scheme are prohibitive for most institutional investors. A portfolio of adaptation projects, structured under a common framework with shared standards and reporting, is a fundamentally different proposition – and a genuinely credible route to mobilising capital at the speed required. 

  
  

• It deploys blended capital so that public and private money play different roles. Concessional capital absorbs first-loss risk. Public balance sheet provides guarantees and resilience-linked payments. Private capital takes the senior, risk-adjusted exposure that matches its mandate. The fund structure is what allows these different pools to coexist and reinforce one another. 

  
  

One important caveat: without project-level structuring sitting inside the fund, fund capital has nowhere credible to go. Cities should not assume that the existence of a vehicle will, on its own, finance their projects – it will not. Any adaptation fund worth establishing must place the discipline of preparing investible projects at its core. 

Why Local Adaptation Funds Matter – and Why They Are Not Enough on Their Own 

The logic for city funds we set out last year still holds, but the adaptation lens sharpens it – and demands a clear-eyed view on what local vehicles can and cannot do. 

Crowding in private capital where it is hardest to reach. Adaptation suffers from deep information asymmetries. A local fund can sit between cities and investors, translating resilience needs into pipeline, and public resources into de-risking instruments that unlock private investment at multiples of the committed public capital. 

Building resilience capability, not just resilience assets. Cities that establish adaptation funds develop durable internal capacity – in climate risk assessment, project structuring, insurance procurement, and long-term capital planning. UNEP’s 2025 report notes that only 17% of global adaptation finance currently reaches local communities; a local fund architecture is one of the most direct ways to change that ratio.^[3] 

Stretching scarce public resources through recycling and leverage. Adaptation spending that flows as one-off grants is gone after a single intervention. Adaptation capital deployed through a fund – as concessional debt, guarantees, or equity – can be recycled, leveraged, and compounded. 

However, this is not to claim that local funds are a universal answer. Many smaller municipalities in Europe do not have the balance sheet to anchor a fund without heavy concessional support – and that support is not as readily available in Europe as it is in some other regions. The honest framing is that local funds and broader regional, national, or European instruments are complements, not substitutes. Existing European tools (for example, InvestEU and the Cohesion Fund) offer real firepower, but the persistent challenge is how those instruments actually reach cities. Bridging structures that connect local vehicles to European-scale capital pools are part of the architecture, not an alternative to it. 

What, then, would an excellent European model look like? In our view, it would assign distinct roles to distinct sources of capital rather than expecting any single pool to do everything. Catalytic, one-time capital – from philanthropy, the EU budget, or national green funds – should be used not to finance projects directly but to capitalise the formation of local and regional vehicles: covering the design, legal, and governance costs that cities cannot easily fund themselves, and seeding first-loss tranches. De-risking capital – guarantees and concessional debt from the European Investment Bank, national promotional banks, and development finance institutions – should sit between the catalytic one-time layer and commercial capital, absorbing the risks that deter private investors. Commercial capital – from pension funds, insurers, and institutional investors – should take the senior, risk-adjusted exposure that matches its mandate. 

Where smaller cities cannot anchor a standalone fund, regional or thematic vehicles can aggregate several municipalities under shared governance, with European instruments acting as the wholesale enabler rather than the retail financier. 

And investment capital is not the only constraint: the capability gap inside city administrations – the ability to model climate risk, structure projects, and govern a vehicle – is at least as binding as the availability of finance, and any serious model should address this capacity gap 

Beyond Finance: Decision-Making, Institutional Confidence, and Political Co-Benefits 

It would be a mistake to treat adaptation purely as a financing problem. Even the best-designed fund will fail if the institutional environment around it is not equipped to make decisions, sustain commitment, and carry political weight. 

Three non-financial dimensions deserve as much attention as the capital structure itself: 

• Effective decision-making. Adaptation interventions cut across departments – planning, transport, water, public health, social services – in ways that mitigation projects often do not. Cities need governance arrangements capable of making timely, integrated decisions across these silos, with clear accountability for outcomes. A fund that is bolted onto a fragmented decision-making structure inherits its dysfunction. But the reverse is also true, and is one of the most underappreciated benefits of the fund model: the discipline of establishing a fund forces a city to reconcile the competing priorities of its sustainability office, its finance directorate, and its political leadership around a shared investment logic. The act of creating the fund can be as valuable as anything it subsequently finances. It functions as an institutional commitment device – a form of insulation against the ad hoc, incremental triage that can adversely affect operational decision-making, and that allows adaptation to be quietly deprioritised whenever fiscal pressure or political attention shifts. 

  
  

• Institutional alignment and confidence. Investors do not commit to vehicles whose sponsoring institutions cannot demonstrate continuity, credibility, and capacity. For a city, this means alignment between the executive, technical departments, finance officers, and elected leadership – and the institutional confidence to engage with capital markets on equal terms. Building this takes time and it cannot be outsourced. 

  
  

• Political co-benefits. Making the public case for adaptation can be challenging: its benefits are often hidden until an event such as a flood or heatwave makes them visible. Cities that frame adaptation around its co-benefits – cleaner air, lower energy bills, healthier neighbourhoods, jobs in nature-based infrastructure, more equitable urban environments – build the political durability that long-term capital deployment requires. This cannot be a communications afterthought; it must be a structural feature of any adaptation fund that aims to outlast electoral cycles. 

  
  

Financial design and institutional design must move in step. Where they do, capital follows. Where they do not, capital stays on the sidelines – not because the projects do not exist, but because the institutional fabric to absorb capital is not yet there. This is also the most common reason that well-intentioned support models disappoint: many programmes that set out to help cities finance adaptation stop at the financial dimension, offering capital or capital-structuring advice while leaving the decision-making, alignment, and political groundwork untouched. They are then surprised when the money does not arrive. The lesson of the past decade is that the financial and the institutional cannot be sequenced; they must be built together. 

The Renewed Case for Innovation 

When we wrote about city funds last year, the backdrop was a relatively benign one for climate finance. That has changed. Fiscal space is tighter, development assistance is under pressure, and multilateral bank disbursements have softened – even as the physical impacts of climate change materialise faster than anticipated, exposing cities in Europe and elsewhere to mounting insured and uninsured losses. The insurance sector is retrenching from high-risk geographies, creating coverage gaps that threaten the viability of urban economies.

In this environment, incremental approaches will not suffice. What is needed is a wave of financial innovation analogous to what transformed renewable energy markets: new vehicles, new incentive structures, new asset classes, and new ways of pooling risk across public, private, and insurance-sector balance sheets. Encouragingly, the building blocks are emerging – from parametric insurance structures such as the UN Capital Development Fund’s Climate Insurance-Linked Resilient Infrastructure Financing to resilience bonds being piloted by coastal cities, to community-controlled adaptation funds being developed by local networks in Asia and Africa. 

It is worth being precise about what ‘a new asset class’ requires, because capital is exacting about the threshold. Investors do not allocate to a category until it offers a recognisable risk-return profile, comparability across deals, liquidity or a credible path to it, and data on which to price risk. Adaptation does not yet clear that bar at scale – and part of the reason is that capital itself remains siloed: climate funds, infrastructure funds, insurance balance sheets, and development finance – each see only a fragment of an adaptation investment, and none is structured to underwrite the whole. On the ground, by contrast, integration is increasingly the norm: a single resilience project is simultaneously infrastructure, insurance, public health, and economic development. This is precisely the gap a fund is built to close – which means the reach of the innovation required is greater than simply inventing new instruments. It extends to reorganising how existing pools of capital view and combine around the same asset. 

In this respect, Europe has something to learn from elsewhere. Some of the most advanced experimentation in pooling, parametric structuring, and community-controlled adaptation finance is happening in Asia and Africa, often born of necessity and of starting points very different from those in Europe. These are not criticisms of the European approach but insights for it. They point to the value of complementarity with existing instruments – while also gently underlining that Europe’s mature institutional toolkit will itself need to evolve if it is to channel capital to adaptation at the pace the next decade demands. 

Working with Cities to Build Adaptation Funds 

At BwB, we are applying a decade of experience at the intersection of public purpose and private capital to the adaptation challenge. Much of that experience has been built through our role designing the financial architecture of the Climate City Capital Hub, developed in partnership with NetZeroCities under the EU’s Climate-Neutral and Smart Cities Mission. The same logic now extends naturally to the EU’s Adaptation to Climate Change Mission – the parallel effort to support European regions and communities in building resilience and which gives the adaptation work described here its policy home. The Capital Hub, initially designed with a mitigation orientation, is increasingly the platform through which adaptation finance can be channelled, and the natural bridge between local city funds and European-scale instruments. 

We are clear-eyed about being early in this work – and about what it takes to bring a fund into being. The conception phase is rarely smooth. It typically depends on finding a source of one-time, catalytic capital willing to fund the unglamorous work of design, legal structuring, and governance before any project is financed – without which a fund cannot exist. It depends, too, on strategic complementarity with senior levels of government, whose backing can supply the guarantees, balance-sheet support, or regulatory comfort that a city alone cannot. Our live mandates with European city partners are at the design and feasibility stage, with adaptation components emerging as a defining feature of several of them, and it is precisely this early enabling work that we see as central to the task. 

Our approach to helping cities establish adaptation funds spans the full lifecycle: 

• Strategic design and feasibility: Assessing the city’s adaptation priorities, revenue and risk profile, institutional context, and investor landscape to determine whether – and in what form – a fund is the right vehicle. 

  
  

• Fund structuring and legal architecture: Designing the governance, capital stack, and legal form of the fund, including the blend of concessional and commercial capital, risk-sharing instruments, and insurance linkages required to make it bankable. 

  
  

• Pipeline development and project preparation: Working with city teams to build a portfolio of investible adaptation projects – from flood defences and cooling infrastructure to nature-based solutions and resilient public assets – the project-level structuring that gives fund capital somewhere credible to go.

• Capital mobilisation: Connecting cities to institutional investors, development finance institutions, philanthropic capital, and insurance partners, and structuring the instruments that allow these different pools of capital to co-invest. 

  
  

• Capacity building and governance support: Helping cities build the internal teams, investment committees, and decision-making processes that allow a fund to operate with discipline over time. 

  
  

Over the coming year, we will publish a series of follow-up notes drawing on this live work – examining key issues such as the governance challenge, the pipeline question, and the investor landscape and appetite we encounter in practice. The goal is to reflect on our experiences in real-world mandates, and to share what we learn with city leaders, investors, and policymakers. 

The Road Ahead 

Climate finance is turning towards adaptation. The investment gap is larger, the structural barriers are higher, and the social stakes are more immediate than on the mitigation side – but these are features of an opportunity, not an intractable problem. 

• For city leaders: The decisions taken now – whether to establish local adaptation funds, build the institutional capacity to govern them, and frame adaptation around its political co-benefits – can determine how well cities are positioned for the resilience economy that is taking shape. 

  
  

• For investors: The asset class is emerging, even if it has not yet matured. The cities and intermediaries that engage early will set the standards, structures, and terms. The opportunity is not to wait until adaptation is fully formed, but to participate in defining it. 

  
  

• For policymakers: The existing European toolkit is necessary but not sufficient. The work ahead is to ensure that EU-level instruments reach cities, that concessional support is available where local balance sheets cannot anchor vehicles alone, and that local funds and European instruments operate as a single, coherent architecture rather than as parallel silos. 

  
  

BwB is committed to building this architecture in partnership with the cities, investors, and policymakers that can make transformative change possible. 

References

[1] United Nations Environment Programme. (2025). Adaptation Gap Report 2025: Running on empty – the world is gearing up for climate resilience – without the money to get there. United Nations Environment Programme 

[2] ibid. 

[3] ibid.