Climate change – it’s time to invest in how we adapt

After the catastrophic bushfire season of 2019-20, and the record-setting global weather events of 2021, 2022 must be the year that we invest in climate adaptation. For humanity to cope with the dramatic changes caused by a warming planet, there is no alternative.

With much focus on achieving ‘net zero’ in the decades ahead, one can forget that climate change is already here and adapting now is critical. The Australian ‘black summer’ of 2019-20 brought drought and record temperatures; 18.6 million hectares of land burned causing loss to human life and devastating wildlife and natural habitats.

Globally, 2021 brought the warmest average land temperatures ever recorded. Despite ambitious pledges made at COP26 in Glasgow, current policies put us on course for a +2.7 degree rise by the end of the century[i]. Consider the extremes we are experiencing at just +1.1 degrees above pre-industrial levels. During 2021, major regions of the world experienced record-breaking temperatures that caused wildfires, destruction and deaths. Then, changing weather patterns brought cataclysmic rainfall, followed by severe flooding that caused more devastation in Germany, India and China. [ii]

A world that is just three degrees hotter will see areas becoming uninhabitable, creating millions of refugees. Unpredictable weather will bring risks to people, property and essential services, and it will be expensive – Australia’s black summer cost billions in property and economic loss. Food and water shortages will be more likely, as will climate-induced illness and death. But investing to adapt could bring major benefits. The Global Commission on Adaptation has identified $1.8trn in investments that could deliver net benefits of $7.1trn by 2030[iii].

Many areas of the economy will need to adapt. Property is particularly vulnerable as it can face fire, storm and flood damage, rising insurance costs and greater energy costs. Residential and commercial property will have to be built to withstand severe rain, storms and much higher temperatures. Cooling systems will need to be compatible with a low-emissions future.

A less predictable climate will require different infrastructure: drainage systems and ‘sponge city’ capabilities that allow densely built-up areas to cope with severe rainfall and floods; electric grid systems ‘hardened’ to withstand weather extremes. Durable electric microgrids have been trialled in Texas[iv], that kept going when there were widescale outages. In the US, utility companies like Consolidated Edison, are spending over £1bn a year on resilience[v].

Agriculture will also have to change so that planting and harvesting seasons can continue in hotter, wetter or drier weather. Restoring degraded pastures, planting forests with greater fire-risk awareness and other adaptations will help to capture carbon and protect against extreme weather[vi]. Investing in adaptations now will cost less than repairing after further damage.

All over the world, there are opportunities for investors to become involved in helping countries and businesses build climate-change resilience. Research by Munich Re shows that linking adaptation and insurance, for example by restoring coral reefs that reduce storm damage, or by planting to alleviate flooding, could reduce premiums and bring a six-fold investment return. [vii]

Without adaptation, businesses face physical damage and power outages – and extremes of weather may interfere with renewable energy sources. It’s likely there will also be more supply-chain disruptions, insurance losses, commodity shortages and inflation, making the financial case for incorporating climate adaptation into investment decisions.

For early movers, there are numerous investment opportunities: utility companies wanting to create more weather-resistant grids; homebuilders specialising in heat- and flood-resistant designs; governments with innovative resilience projects. These opportunities will only expand.

There is an urgent need to invest now in climate resilience. COP26 rightly showcased the need for adaptation finance, putting the topic ahead of mitigation in the final agreement[viii]. It is time for investors to wake up to the reality of climate change today and invest in adapting to its consequences.  

Below are some examples of adaptation:

Republic of Chile

Chile is vulnerable to climate change with record-breaking droughts, wildfires, floods, landslides and a "red bloom" of algae (from warmer seas) killing millions of fish, including 20% of the coastal salmon population.

It is the first South American country to issue a green bond, the use of proceeds of this investment include specific projects to enhance climate resilience. This includes flood defence infrastructure, efficient irrigation systems, the upgrading of water waste management and water pollution prevention measures.

Suez SA

Operating on six continents and in areas at risk of water stress including Southern Europe, Middle East and Northern Africa, Suez is a global water utility company. It helps society adapt to the impacts of climate change by combating water stress through maximizing the volumes of alternative water (re-use of wastewater, desalination). Suez has ambitious goals in this area. The company also addresses increased risk of flooding via its predictive tools that alert local authorities.

The Netherlands

In addition to higher temperatures and increasing rainfall severity, the Netherlands is vulnerable to rising sea levels. Building on a long history of flood defence practices, in 2020 the government issued a green bond with proceeds directed to adaptation. This included investments in flood risk management, freshwater supply, maintenance, experimentation, network related costs and water quality. 

[i] 3 degree rise risk: Glasgow’s 2030 credibility gap: net zero’s lip service to climate action | Climate Action Tracker (09.11.2021)
[ii] Extreme weather: https://www.carbonbrief.org/guest-post-reviewing-the-summer-of-extreme-weather-in-2021 (08.09.2021)
[iii] Return on adaptation investment:  https://www.geospatialworld.net/blogs/investing-1-8-trn-in-climate-adaptation-could-yield-4x-benefits/ (09/11/2019)
[iv] Microgrids: https://theconversation.com/texas-electricity-grid-failure-shows-how-microgrids-offer-hope-for-a-better-future-155708 (23/02/21)
[v] Utilities investing in resilience:  https://www.utilitydive.com/news/northeast-utilities-are-spending-billions-on-resilience-and-the-investment/608378/ (10.11.21)
[vi] Resilient agriculture: https://www.worldbank.org/en/topic/climate-smart-agriculture (05.04.21)
[vii] Using natural solutions: https://www.munichre.com/topics-online/en/climate-change-and-natural-disasters/resilience/mother-nature-has-the-answer.html (14.09.2020)
[viii] https://unfccc.int/sites/default/files/resource/cop26_auv_2f_cover_decision.pdf  (Nov 2021)

Thomas Leys, Investment Director, Fixed Income Research, abrdn.

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