The financial sector’s interest in adaptation and resilience has grown significantly in the last few years, but more tools and information are needed to re-design decision-making. Dr Nicola Ranger, Director of the Global Finance and Economy research group and the Resilient Planet Finance Lab, and Roberto Spacey Martín, Alignment Lead at the Resilient Planet Finance Lab, discuss some of the latest advances for adaptation finance and where more work needs to be done.
For a long time, adaptation finance has been the poor cousin to net zero and transition finance. In many ways, it was hampered both on the demand-side and the supply-side. Businesses have struggled with the lack of clear targets and plans by government against which to invest, which dampened demand. On the supply-side, adaptation finance was hampered by a (we argue, false) assessment that adaptation does not bring returns and means high up-front costs and only long-term (and uncertain) returns.
What do we mean by adaptation? Climate adaptation refers to activities that help us build resilience to physical climate-related risks, such as storms and droughts (as examples of acute risks) and rising sea levels and temperatures (as examples of chronic risks). These activities can either focus on a particular asset, business or community or they can focus on enabling others to respond to these risks by strengthening their adaptive capacity.
For some, the reputation of adaptation as a viable investment option was hampered by the climate finance dialogue – that is, as being primarily about flows from the Global North to the Global South. Elsewhere, dialogues were dominated by attempts to mobilise private finance into traditionally public areas, like flood defences – also reducing the appeal as an investment option.
But all this has changed radically in the past two years.
Many financial institutions and corporates now ‘get it’. We see businesses proactively strengthening their own resilience to physical climate risks and seeking opportunities to invest in the transition toward more resilient (and net zero) economies. Working groups have popped up like spring flowers, often oversubscribed and actively churning out reams of evidence, guidance and best practice. Whole ecosystems of new enterprises have appeared, particularly in data and technology, and traditional players are competing to launch new products. New adaptation taxonomies are appearing each month.
And what is it they ‘get’? That it’s not all about flood defences. Every business in the world will need to take some action to adapt to a changing climate. Every new piece of infrastructure – financial flows of $2.9 trillion a year – will need to be made resilient. Where and how we grow food and use water will need to change. And we will need to transform our supply chains and economy to protect our natural capital – fundamental to resilience – upon which our core commodities and supply chains rely.
The Resilient Planet Finance Lab was established in June 2023, in partnership with the UN Office for Disaster Risk Reduction and the Insurance Development Forum, to connect the financial sector with these emergent opportunities in adaptation. In our first year, we worked with hundreds of private and public sector partners across multiple countries to collaborate and equip them with the tools and evidence to grow adaptation finance based on world-leading science and research.
Last week, we launched a report of our first years’ activities. Five key insights stand out from our engagements:
- To a large extent, we already have the metrics and standards we need to operationalise adaptation within finance.
Businesses (and governments) often worry that adaptation is hard to measure. We reviewed 30 existing financial standards frameworks and found more than 300 existing adaptation metrics and targets. It’s about water, food, natural capital, supply chain resilience. It’s not rocket science. Our research also underlines that investments in adaptation create co-benefits for all these other areas and vice versa. Initiatives like the Adaptation and Resilience Investors Collaborative are producing new helpful guidance tailored to particular sectors and investment processes. - We’re not short of data, but we are short of experience in business and investment of how to use it well.
Our work with the Climate Financial Risk Forum identified and assessed more than 100 climate-related datasets and provided a new framework and case studies for incorporating this data into adaptation finance decision making. Climate Data 111+ is our comprehensive database that can be used to find data for climate risk assessment, adaptation planning, policy development, and resilient infrastructure design, which complements our online platform (Resilient Planet Data Hub). To support financial institutions, we also worked with partners to develop case studies of applications in financial risk assessment and sovereign credit ratings, nature-based investments and resilient infrastructure. - Efforts to price and manage risks are however being hampered by current scenarios and approaches that do not capture the risks adequately.
In the underbelly of integrated assessment models (which underpin the NGFS scenarios among others) lie a series of simplified relationships and assumptions that underestimate the risk of climate change and miss key interlinkages with biodiversity loss. In pioneering work with multiple partners, we developed a new narrative-based scenario-building approach. We applied this in the first study on the macro-financial risks of integrated climate-nature risks in the UK to demonstrate how this can help counteract some of these shortcomings. The next generation of analytics will need to further refine how these insights can be brought to financial institutions. - Taxonomies are everywhere and already being used by many asset managers to structure adaptation-aligned portfolios.
Taxonomies are considered to be a cornerstone for sustainable finance regulation, paving the way for targeted policy intervention. We found that over 25 adaptation taxonomies have been published in the last four years by government and financial institutions. There is still some work to be done on harmonisation and getting them integrated into legislative frameworks, but they all point to the same sector opportunities: agrifood, forestry, water, health, etc. - Integrating resilience into emerging transition plans makes sense. So far, firms have taken the ‘low-hanging fruit’ with few signs that adaptation is being fully addressed.
In an analysis of 100 company sustainability reports we found that firms already mention resilience in their business strategy and have policies in place to reduce significant harm to resilience and assess environmental impact. However, companies are much less likely to integrate nature into their risk assessments or draw up relevant targets for resilience, for example. But this information is important for investment decision-making and policy intervention to grow adaptation finance. Together with the Climate Financial Risk Forum we identified the different elements of a comprehensive integrated transition and adaptation plan to support more effective disclosure. Now, we need to devise tools that can incorporate these insights into risk assessments.
A sixth key insight, however, is that a lack of government action is stifling progress. Financial institutions and corporates struggle to align their business plans and investments with adaptation needs when there is no clear plan from government or sense of what good adaptation looks like. Our Mission Climate Ready report last year, for example, looked at the elements of a successful policy framework to mobilise private finance, and identified 25 key actions to close the gaps for the UK.
The financial sector has been stepping up over the last two years, we now need policymakers to play their role.
Learn more about this and other areas of our work by reading the Resilient Planet Finance Lab Annual Report.