Climate change increases the likelihood of weather-related natural disasters. Their occurrence has increased tenfold since the 1960s, resulting in estimated daily costs of about USD 383 million globally from 2010-2019. We believe the time to adapt to climate change is now and creative strategies can help. Alex Bernhardt explains.
This summer, extreme weather events have captured global attention:
- Hawaii experienced the worst US wildfire in over a century in August, causing nearly 100 casualties and up to USD 6 billion in damage
- Prolonged drought in Canada led to its worst fire season on record, with a burn area four times larger than average, causing cities to be evacuated
- Europe grappled with extreme heat, with temperatures exceeding 40°C in Spain, Greece, Italy, and Albania
- Northern Italy faced violent storms with hailstones the size of melons causing extensive damage.
These events may seem like extremes, but their occurrence will likely only increase as a result of human-induced climate change.
The projected rise in temperature caused by the greenhouse gasses already released into the atmosphere will raise sea levels by 0.6 meters by 2100, according to NOAA. A 1.5°C scenario could trigger critical earth system ‘tipping points’. If half of the world’s glaciers melt and the Greenland and West Antarctic ice sheets collapse, there could be dire consequences for societies and the economy from flooding.
Mitigation and adaptation measures
Responding effectively to climate change requires investment on two fronts: mitigation and adaptation.
Mitigation has gained considerable attention in recent years, with 91% of the global economy now committing to net-zero goals. As such, the associated investment requirements are well researched.
The International Energy Agency’s Net Zero by 2050 roadmap shows that investment in the energy sector needs to increase to USD 5 trillion a year by 2030, with investment in clean energy and electricity infrastructure tripling over that time frame.
McKinsey has priced the energy transition at USD 9.2 trillion a year (of which USD 3.5 trillion would be considered new spending on low carbon assets).
Unfortunately, we still have a long way to go to meet these investment requirements (in 2022, investment in clean energy technology exceeded USD 1 trillion for the first time), but at least the target is clear.
Adaptation has historically been comparatively under-funded and under-researched. Estimates of aggregate adaptation costs are as high as USD 500 billion per annum by 2050 for developing countries alone. These are likely significantly understated in light of recent science pointing to the larger-than-expected impact of 1.5°C warming.
Adaptation in practice
In practice, adapting to climate change can involve simple behavioural changes such as using less water during droughts or farmers planting crops better suited to the changing climate. Adaptation projects can also be high-tech and large-scale.
As an example, water levels on the Albertkanaal in Belgium – an important economic waterway with total traffic of 40 million tonnes each year – have dropped, occasionally to levels too low for commercial shipping. This is expected to become more common with climate change.
In response, seven locks have been built costing EUR 7 million each, pumping water upstream. In times of excess flow, the locks release water while generating hydroelectric power. Officials expect the system to generate more power than is used to operate it.
More examples of adaptation measures taken across the EU can be found here.
Benefits of adaptation – An example
The US National Institute of Building Sciences has estimated the benefit-to-cost ratios of different climate-related building adaptation interventions based on models that do not explicitly consider the effects of climate change (see Exhibit 1). If the impacts of climate change were to be considered, these ratios would likely increase.
The NIBS has noted that while US disaster losses from wind, floods, earthquakes, and fires have averaged USD 100 billion per year, cost-effective adaptation strategies can reduce these impacts. Adopting agreed building code requirements could save USD 11 per USD 1 invested, while retrofitting telecommunications, roads, power, water, and other lifelines could save USD 4 per USD 1 cost, helping society and the economy to better resist disasters.
Implications for investors
Recent policy advances have been seen in the US, where the Biden administration has allocated USD 3 billion to adaptation: USD 1.8 billion will support critical resilience projects, while USD 642 million will aid community flood mitigation efforts.
Investors and asset managers can play a significant role in addressing the challenges of climate adaptation. Currently, only 21% of climate finance from wealthier nations, roughly USD 16.8 billion annually, concerns adaptation measures.
Private capital mobilisation for these projects has fallen short of expectations. The high-risk nature of investing in novel projects could be deterring private organisations. Moreover, many of the benefits of adaptation projects are either difficult to capture in the short term (e.g., avoided future losses), or ‘non-market’, meaning there is no way to monetise them. The benefits may also accrue at a community level rather than to individual stakeholders, which can preclude collective action.
To attract private investors, a variety of creative strategies should be explored or rolled out more widely:
- Public entities utilizing an ensemble of funding sources to capture the non-market benefits their investments produce and encourage them to sponsor more adaptation projects using private capital.
- Using multi-stakeholder deal and financing structures to better capture the benefits of community-level interventions.
- To underwrite early-stage risks and improve the risk profile of projects, a coalition of public agencies, development banks and other international financial institutions, philanthropists, and governments could make private investment via blended finance more attractive.
This is by no means an exclusive list. As weather extremes worsen, the urgency for creative adaptation solutions will only increase.
Disclaimer
Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
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