In a recent article, Climate Change Lead Thibaud Clisson referred to the need for the world to sharpen its focus on adapting to higher temperatures as well as doubling down on efforts to minimise further temperature increases. Here, he provides more detail on climate change adaptation and the roles that investors and asset managers can play.
What is climate change adaptation?
The impact of climate change is unmistakable, with extreme weather events becoming more severe and more frequent. Western Europe has experienced its hottest-ever June, with two heatwaves estimated to have caused 2,300 deaths across 12 major cities. Catastrophic flooding is also becoming more frequent1, as we have seen in Australia and the US this year.
With temperatures continuing to rise, taking measures to adapt is becoming increasingly urgent. According to UNFCC, climate change adaptation is defined as “adjustments in ecological, social or economic systems in response to actual or expected climatic stimuli and their effects”.
Such adjustments could include actions to reduce the impact of flooding by building flood defences, using more porous materials for road surfaces in urban areas or restoring mangrove forests in coastal areas.
Changes to social systems could include strengthening the infrastructure of public health to cope with more heat-related illnesses, while economic adjustments could include more investment in climate-resilient crops or providing specialist insurance schemes for farmers.
A major focus for COP30
Adaptation is going to be one of the central themes at the COP30 Climate Change Conference, which will take place in Brazil in November.
Many countries, especially those that are being hit hardest by, but are least responsible for, climate change, are demanding more support and financing to help them adapt and safeguard lives, livelihoods and ecosystems.
COP30 President André Corrêa do Lago has said that increasing resilience must be a fundamental part of countries’ public policies.
The challenges facing climate adaptation
Adapting to climate change is not without challenges, especially in the most vulnerable regions.
One of the biggest is securing adequate financing. Private capital can be hard to attract as adaptation projects such as flood defences often do not produce direct cash flows (unlike mitigation projects such as renewable energy plants), and their benefits are typically felt at the community level rather than accruing to a single entity.
What’s more, many adaptation investments only produce long-term benefits in the form of avoided future losses, which means other projects producing short-term gains are often prioritised.
Data and knowledge gaps pose a challenge – many communities lack the localised climate projections or information needed to plan effective responses. Furthermore, considerable modelling expertise is needed to quantify the costs and benefits of investments in individual adaptation initiatives, especially given the uncertainties inherent in climate change.
Similarly, many entities looking to put in place adaptation measures (generally public bodies) lack the technical or fiscal capacity to do so.
An additional problem lies in the development and application of standards. There is currently no workable universally accepted framework or set of metrics to define what constitutes a ‘resilient’ system. This lack of standardisation makes it hard to measure progress, compare outcomes or ensure accountability. Resilience standards also need to be flexible enough to accommodate diverse local contexts – what works for a coastal city may not apply in a drought-prone rural area.
Maladaptation is another challenge – actions intended to reduce climate risk may unintentionally increase vulnerability or create new problems. For example, building seawalls might protect one area from flooding, but can worsen erosion or flood risk elsewhere.2
The importance of clear adaptation indicators
Part of the 2015 Paris Agreement, the Global Goal on Adaptation seeks to enhance the world’s adaptive capacity, strengthen resilience and reduce vulnerability to climate change.
For mitigation, there are clear metrics of progress in the form of national and global greenhouse gas emissions, but there are no concrete and measurable indicators to track countries’ collective efforts to adapt to a warming climate.
COP28 in 2023 agreed to a framework that defined targets to guide action in the three key areas of food, water and health. Initially, there were 9,000 indicators under consideration. This had fallen to 490 by the time climate talks took place in Bonn this June, but it is still well above the 100 targeted for COP30.
This is a significant issue. Without clear, agreed-upon indicators, it is difficult to measure whether adaptation efforts are reducing vulnerability, building resilience or enhancing adaptive capacity.
Indicators of adaptation are vital for standardised reporting, identifying gaps and directing resources to where they are most needed. Clear indicators also empower countries to develop evidence-based policies and secure international support.
Investors need to play their part
Governments will not be able to do enough on adaptation on their own – private investors will need to play a major role, despite the challenges mentioned above. In particular, they need to provide capital to finance adaptation solutions and encourage the companies they invest in to implement better adaptation measures and improve disclosure.
Regulators need to play their part by incentivising investments in adaptation financing, while asset managers can accelerate progress by developing investment solutions focused on adaptation.
Adaptation can be scaled through different type of investments, such as green bonds, blended finance, public-private partnerships that de-risk investments in high-need areas, or equity by financing companies providing adaptation solutions.
We believe it is a misconception that investors cannot profit financially from allocating capital to adaptation. Resilient infrastructure and adaptive technologies can generate attractive returns, and investments in adaptation can reduce the physical risks to which portfolios can be exposed.
Given the scale of the risks that countries are facing as a result of climate change, regulatory incentives may increasingly support investments aligned with resilience goals.
Conclusion
Climate adaptation is opening opportunities for investors. For instance, companies specialising in technologies such as desalination or air conditioning are well positioned to benefit as demand for such solutions is set to grow in response to rising temperatures and water scarcity.
Adaptive technologies are becoming essential in regions grappling with climate change. However, some of these technologies might be energy-intensive, which raises concerns over their long-term sustainability.
That is why adaptation cannot stand alone. Efforts by companies and society to adapt to climate change must be paired with robust strategies that reduce carbon emissions and support a more sustainable future. The world is heating up faster than hoped, so efforts to minimise global temperature increases need to be stepped up, too.
[1] How climate change worsens heatwaves, droughts, wildfires and floods
[2] MIT School of Engineering | » Can seawalls prevent beaches from eroding?
