Climate adaptation: identifying the investment opportunity

Time to cut greenhouse gas emissions and avoid catastrophic climate change is running out, but efforts and investments are increasing. Similar effort and investment to build resilience to the effects of climate change are also required, writes Virginie Fayolle.

Every fraction of a degree rise in average global temperature brings more devastating impacts – more extreme weather, sea level rise, and ecosystem effects – and requires more money to be spent on coping.

The Intergovernmental Panel on Climate Change’s sixth climate change assessment in 2022, ‘Impacts, adaptation and vulnerability’, emphasises that greenhouse gas emissions to date have set in motion irreversible change for years to come. The world will continue to warm even if emissions could be stopped today – and will warm more, for longer into the future, in response to continuing emissions. Emissions must be cut with urgency. And the systems society relies on – buildings, economic and social infrastructure, industry, agriculture and the natural environment – must be made more climate resilient.

Emissions reduction and resilience are both crucial for prosperity and social wellbeing. In a 2019 report, ‘Adapt now: a global call for leadership on climate resilience’, the Global Commission on Adaptation (GCA) concluded that US$1.8trn needed to be invested in resilience, globally, from 2020 to 2030, but estimated it would generate US$7.1trn in benefits. The overall rate of return can be 10:1 or higher.

However, spending on adaptation lags well behind spending on emissions reduction. Analytics and advisory organisation Climate Policy Initiative tracks climate finance, which in 2019-20 reached US$632bn. Of that, only US$46bn went on adaptation and resilience.

Better balance

Financing adaptation and resilience is a challenge. Consider the different social, economic and environmental assets and systems at risk, variation in the type, probability and severity of climate impacts in different places, the progressive nature of climate change, and uncertainty as to exactly how it will progress in each location: it creates a wide range of scenarios, requiring diverse and often unique adaptive measures.

Companies often do not label adaptive activities as such, instead placing them under other strategic, risk management or project design headings.

In addition, the benefits from investment in adaptation and resilience are typically considered in terms of avoided losses and cost-benefit ratios. This contrasts with mitigation projects that deliver an output or product that can be sold, such as renewable electricity.

Regulatory and market pressures are starting to make resilience a focal business issue. One example of increasing private sector appetite for adaptation finance is the growing use of green bonds for climate adaptation – news service Environmental Finance reports five-fold growth in 2021 in the value of green bonds focused on adaptation.

But to improve balance between investment in climate change mitigation and resilience, and to increase the level of private investment overall, requires stronger business cases and enabling environments – policies, regulation, governance and institutional capacity. Estimating the probability, severity and consequences of physical climate risks is an important starting point.

From assessment to investment

Mott MacDonald is an engineering, management and development consultancy, involved in planning, designing, delivering, operating and investing in social and economic infrastructure, globally. We have been assessing physical climate risks on our major projects for several years and are committed to assessing climate risks on all our projects by the end of 2024. We have set out to enable all organisations to assess their exposure to physical risks and account for it in their asset valuations.

In partnership with the Coalition for Climate Resilient Investment (CCRI), we have developed the Physical Climate Risk Assessment Methodology (PCRAM), initially focusing on large-scale infrastructure. PCRAM provides the means for investors and infrastructure owners and operators to develop a costed, common understanding of risk and opportunities for reducing exposure. It illustrates the business case for investing in resilience, and the most cost-effective way to achieve it.

We will continue supporting our clients to access and mobilise finance to close the gap between climate ambition and delivery, in both developed and developing economies.

Virginie Fayolle

Technical principal, climate finance, Mott MacDonald

The African Development Bank is developing and piloting another valuable solution to address the investment shortfall in adaptation. Its Adaptation Benefits Mechanism will certify the social, economic and environmental benefits of adaptation projects. Certification can be used by project developers to demonstrate the benefits of adaptation and raise private sector capital. Certification will introduce transparency and enable comparison between climate resilience projects.

Meanwhile Lightsmith Group, a US-based private equity firm, is investing in companies that specialise in providing adaptation and resilience solutions. Its aim and expectation is that as solutions are scaled-up their cost will fall, creating a virtuous cycle of increasing accessibility and affordability.

At the COP26 international climate summit in November 2021, a two-year work programme was initiated to progress the Global Goal on Adaptation first set out in Article 7 of the Paris Agreement, in 2015: to enhance adaptive capacity, strengthen resilience and reduce vulnerability to climate change, with a view to sustainable development. The work programme will shine a light on progress, needs and shortfalls in building adaptive capacity. Achievements will be reported at COP27 in Sharm El Sheikh, Egypt, in November 2022.

As the climate dialogue increasingly embraces adaptation alongside mitigation, we will continue supporting our clients to access and mobilise finance to close the gap between climate ambition and delivery, in both developed and developing economies.

To find out more about PCRAM, click here.