In an era where climate change is not just a looming threat but an unfolding reality, the concept of climate adaptation emerges as the bearer of hope and opportunity. Recognising climate change as the defining challenge of our generation, it is critical to understand that the impacts of rising temperatures by 2100 will be far-reaching, affecting everything from food production to water management, urban infrastructure and the resilience of communities facing increasing natural disasters.
Climate adaptation, defined as the ability to change processes, practices and structures in response to actual or expected climate impacts, and to recover from climate-related disasters, is an opportunity and a key theme that was addressed at COP28 in the United Arab Emirates (UAE), where the focus is on how governments, non-governmental organisations (NGOs) and companies can adapt to climate risks.
The effects of climate change on our economies are stark. In 2022 alone, insured losses from natural catastrophes reached an estimated $140bn, marking 2022 as the fifth year since 2017 to cross the $100bn threshold.
The regional impacts of climate change vary, with Asia facing significant physical risks due to the high occurrence of weather disasters alongside low existing adaptive readiness, which also means that the financial or social impacts are felt more strongly. In India, the India Meteorological Department (IMD) reported the hottest March in 122 years while Africa was faced with the worst drought in decades with over 50 million people faced with food insecurity.
The Intergovernmental Panel on Climate Change (IPCC) has shown how climate drivers like temperature increases and sea level rises are causing more acute changes such as heat waves, droughts and flooding and biodiversity and habitat loss, which is adding an indirect pressure on energy consumption. This is being felt particularly in regions like Asia, a major energy importer that could face material energy security risk and reduced self-sufficiency from 72 percent to 63 percent by 2050.
Meanwhile, the Middle East is focusing efforts on carbon capture, utilisation and storage (CCUS) to mitigate climate risks. This region faces unique challenges, such as extreme water stress with 83 percent of the population already exposed to it, according to the world resource institute, and negative impacts on food production systems with continued heat waves and temperature spikes.
Currently climate financing averages $2-3bn annually where there is good room to grow financing through policies and standards for both climate mitigation and adaptation solutions.
Identifying opportunities
The investment landscape in climate adaptation is evolving. Invesco’s ESG mid-year outlook, published in 2023, highlights opportunities around climate mitigation, adaptation and transition. The need for significant climate finance to meet the global 2030 climate objectives is particularly acute in Latin America, Africa and across the Asia Pacific.
The World Bank Group and Global Facility for Disaster Reduction and Recovery (GFDRR) estimate a financing gap of $12.4-13.1bn in Sub-Saharan Africa alone, nearly double the tracked investments in climate adaptation in the region.
The role of private capital in closing this gap cannot be overstated. While public entities such as multilateral development banks (MDBs) and development finance institutions (DFIs) have been dominant in funding climate initiatives, the launch of the loss and damage fund has been operationalised during COP28, initially providing $245m with contributions from the UAE, UK, US and Japan. Still, The UNEP’s 2023 adaptation gap report estimates the investment gap could be between $194-366bn by 2030 in developing economies.
To meet these challenges, an increase in private sector investment is essential. Many emerging market and developing economies, already burdened with high debt and constrained budgets post-pandemic, are facing higher costs to borrow capital in the current high inflationary environment, creating additional barriers. This situation further underscores the need for innovative finance solutions that leverage both public and private capital.
Mobilising capital
Investment firms can play a pivotal role by offering institutional investors access to climate adaptation investments in developing nations to not only generate returns, but also contribute to both climate and investment objectives. Blended finance, combining public and private funds, offers unique opportunities to provide better risk-return profiles for investing in climate adaptation. For instance, the enhanced use of multilateral development banks and donor’s guarantees can help de-risk and broaden the investor base.
The potential benefits of investing in climate adaptations are immense. Bloomberg New Energy Finance (BNEF) estimates a $194 trillion investment gap in order to meet Net Zero by 2050. However, the Global Commission on Adaptation suggests that investing $1.8 trillion globally in five years within early warning systems, climate-resilient infrastructure and agriculture among other sectors could generate $7.1 trillion in total net benefits.
During COP, 130 countries have agreed to triple renewables and double the rate of energy efficiency improvements, while 50 oil and gas companies have agreed to cut methane emissions and eliminate routine flaring by 2030 under the Oil and Gas Decarbonisation charter.
This will lower global energy related GHG emissions by 4 billion metric tonnes of carbon dioxide equivalent in 2030, which is equivalent to approximately 1/3 of the emissions gap needed to be tackled within the next six years to limit warming to 1.5C above pre-industrial levels.
By mobilising public and private capital towards climate adaptation solutions, Invesco is working closely with investors who have the chance to demonstrate leadership in the transition to a more resilient world. This approach offers the potential for significant economic returns, along with social and environmental benefits.
As we navigate the challenges of climate change, the triple dividend of climate adaptation – economic, social and environmental – represents a compelling opportunity for forward-thinking investors and sheds light on the way forward to creating a more sustainable future.