The Business Case for Climate Adaptation: Why It’s a Profitable Investment
“Adaptation should not be seen as a cost, but as an investment… Adaptation is good business.”
Prof. Dr. Patrick Verkooiljen, CEO, Global Center on Adaptation.
Recent events have starkly highlighted the urgent need for climate adaptation. The 2023 heatwaves in the Pacific Northwest and Canada, the fires in Rhodes, the devastating floods in Germany and Belgium, and Madagascar's worst drought in decades all underscore the increasing risks of climate extremes. Coupled with the latest IPCC report warning of more frequent and severe climate events, these incidents emphasise the pressing need for investment in climate adaptation strategies. The time to act is now, to both safeguard our future and seize the opportunities this challenge presents.
Climate adaptation is a strategic move not a charitable act. It ensures resilience, risk management, and supply chain support in the face of the climate crisis. Governments, corporations, and impact investors fail to incorporate climate adaptation measures into their strategies are not only missing out on returns, but also endangering their value chains.
The economic advantages of climate adaptation include consistent or increased agricultural production, higher household incomes, improved environmental services, long term assets, and reduced vulnerability to extreme weather events. The World Resources Institute finds that every dollar invested in adaptation yields net economic benefits ranging from $2 to $10.
Climate adaptation vs. mitigation – a false choice
Some argue that by advocating for adaptation we are losing focus on what matters most – mitigation. The IC-VCM (Integrity Council for the Voluntary Carbon Market) resisted a call from the alliance of small island developing states (Aosis) recommending a 5% levy on carbon credit revenues for the Adaptation Fund. It was argued the extra costs it would impose credits could lead to less projects and more emissions.
Investing in climate adaptation can reduce investment risks by avoiding damages and losses. By incorporating adaptation measures into their projects and portfolios, businesses can ensure the longevity of their investments. Even if we limit global heating to 1.5 degrees the world will still change, necessitating adaptation. Climate adaptation must occur alongside mitigation efforts.
The challenge rests on the misconception that there is a discrepancy between mitigation and adaptation. It is vital that as the world travels towards net zero adaptation and mitigation activities are integrated. As the IPCC (Intergovernmental Panel on Climate Change) put it: “The solution lies in climate-resilient development. It integrates adaptation and mitigation to advance sustainable development for all…”
The Business Case for Climate Adaptation Investment
Climate adaptation finance is not seen as profitable enough to attract private funding because it is a preventative measure. In accounting it is hard to value what has been “avoided”. As a result, currently only 1.6% of adaptation funds come from the private sector. However the World Bank states that investing in climate adaptation leads to returns with an average benefit cost ratio of 4:1. The market for adaptation could be worth $2 trillion per year by 2026, indicating a missed opportunity for profit.
The business case of adaptation finance is demonstrated by Commercial International Bank’s Green Bonds. The transactions were commercially viable loans with proven business cases for the bank and clients that supported desalination and water treatment.
Collaboration for a Climate Resilient Future
Global climate adaptation finance reached $46 billion in 2019/2020 according to a report by the Climate Policy Initiative. Estimated costs for 2020-2030 are between $155 billion and $330 billion annually in developing economies according to UNEP (United Nations Environment Programme). And just 50 developing countries identified more than $50 billion per year in adaptation needs in their Nationally Determined Contributions (NDCs) according to their 2018 Adaptation Gap Report.
Governments alone do not have the funds to drive the investments needed. The private sector must also engage in climate change adaptation activities—including as designers, implementers, financers, or evaluators - they need to establish and communicate the business case for investing in adaptation.
A good starting point will be to develop partnerships with others across the investment value chain to ensure that the right capital and support is available. Partnering with accelerators, and both early and late-stage investors is key to supporting innovations, to help solutions become investment-ready, and to grow. It is also vital to work with regulators, standard setters, private businesses and with other governments to unlock private capital and ensure that priority investments happen. To encourage private sector engagement in climate change adaptation activities, it is crucial to clearly communicate the business case for investing in climate adaptation.
Addressing the Climate Adaptation Data Gap
To encourage global-scale investments we need a clear metric to measure progress in long-term climate adaptation efforts. We currently have no equivalent of the mitigation target of “global net-zero” for adaptation. The Global Goal on Adaptation (GGA) was established under the Paris Agreement to enhance climate change adaptation by increasing awareness of and funding for countries’ adaptation needs. However, adaptation is primarily a place based, local activity and as such, a global target has been challenging to establish.
Investors, therefore, have no “North Star” and find it difficult to know what to invest in, and how to assess the investments success. Adaptation metrics can be difficult to grasp - they are not straightforward like reductions in carbon emissions. Using standardised approaches, like those in Gold Standard and RCC’s Adaptation Requirements, to provide a basis for credible calculation of avoided loss for projects can overcome some of these difficulties for funders and investors.
The approach is credible despite the current lack of granular adaptation data because it draws on best available scientific information and combines it with the local knowledge of key stakeholders. This means many of the data gaps can be addressed. The approach assures both public and private investors that their investments will continue producing positive impacts well into the future.
The Case for Action on Climate Adaptation
Investing in climate adaptation is not only a moral obligation, but also a strategic move for businesses, investors, and governments who recognise the role that is needed to be played by finance in addressing climate adaptation. By embracing adaptation, we can enhance resilience and safeguard assets.
The moment to be a leading investor in adaptation is today. The benefits go beyond profits, they will help us to secure a sustainable future for us all.