Invest in adapting to the realities of climate change

By Thomas Leys, investment director, fixed income research, abrdn

All over the world, there are opportunities for investors to become involved in helping countries and businesses build their resilience against the climate extremes.

Climate extremes are already a reality. During 2021, the northwest of the US, Canada, Greece and many other countries experienced record-breaking temperatures. The persistent heat caused wildfires, with Turkey, Greece, California and Siberia among areas to witness devastating loss of habitat and human life. Cataclysmic rainfall, followed by severe flooding, resulting from changes in weather patterns, caused severe destruction and death in Germany, India and China.

But investing now to adapt to climate change 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. And Research by Munich Re has shown that linking adaptation and insurance, for example by restoring coral reefs that reduce storm damage, or by planting to alleviate flooding, could lead to reduced premiums and a six-fold return on investment.

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 in the years ahead. In the UK, which has recently experienced thousands of heat-related deaths and billions of pounds of damage from flooding, a Climate Change Committee report found that the physical risks were ‘underfunded and ignored’ by policymakers.

Infrastructure and agriculture

Changes to the climate require the adaptation of many areas of the economy. Property is particularly vulnerable as it faces storm and flood damage, rising insurance costs, greater energy costs and, potentially, the need for backup generators and emergency systems. The way we build residential and commercial property will need to change, so that it can withstand severe rain, storms and, in some areas, much higher temperatures. In addition, cooling systems for extreme temperatures will need to be compatible with a low emissions future.

A hotter, wetter world will need different infrastructure: much better drainage systems and ‘sponge city’ capabilities that allow densely built-up areas to cope with the flash floods that severe rainfalls bring. Electric grid systems will need to be ‘hardened’ so that they can cope with extremes of weather and temperature. Durable electric microgrids have been trialled in Texas, that kept going and kept revenue flowing when there were widescale outages. In the US, utility companies like Consolidated Edison, are spending more than £1bn a year on resilience. Utility companies not building in resilience will be out of step as the world seeks to decarbonise.

Agriculture will also have to change so that planting and harvesting seasons won’t be so affected by less predictable weather. Restoring degraded pastures, maintaining and planting forests and many other adaptations will help to both capture carbon and protect against effects of extreme weather. Emerging market regions are particularly vulnerable to damage from climate change. Acting and investing now in the necessary adaptations will lead to lower costs than repairing after further damage.

Without adaptation, businesses face physical damage and power outages – it’s important to consider that extremes of weather may interfere with renewables providing a reliable energy source. It’s likely there will also be more supply-chain disruptions, insurance losses, commodity shortages and inflation. These all provide the financial case for incorporating climate adaptation into investment decisions.

The increased investor focus on the causes of climate change and plans to reduce emissions should be celebrated, but there is now an urgent need to invest in climate resilience. The two are complementary and must run in parallel. COP26 rightly showcased the need for adaptation finance, putting the topic ahead of mitigation in the final agreement. It is time for investors to wake up to the reality of climate change today and invest not just in mitigating its causes, but also in adapting to its consequences.