Adaptation Finance: Capitalising on Climate Risk

Adaptation finance fuels revenue through various channels, including resilience-linked products, climate adaptation lending, and adaptation opportunities finance.

You can benefit from developing and offering products that incentivise climate resilience, as you attract environmentally conscious customers and investors.

Lukky stresses, "Financial institutions have to move from static, annual reports to something dynamic that can reflect changing climate realities."

And that's not a small shift: it requires rethinking data pipelines, organisational culture, even board-level priorities.

This also implies that, as a portfolio manager, you need to rethink your investment approach and adapt your portfolio to the emerging climate risk dynamics and the growing demand for sustainable and resilient investments.

Here are examples of how adaptation can generate revenue:

• In Florida, insurance firms offer discounts to policyholders who reduce their climate-related risks, taking proactive measures like installing storm-resistant roofs, shutters, and reinforced garage doors.
• Guy Carpenter's Climate Resilient Development Bond (CRD Bond) combines community insurance, tiered investment, and disaster mitigation funding in an innovative insurance-linked security structure.

  With the CRD Bond, a municipality could insure its community against climate-related risks with a commercial insurer, paying premiums that become more affordable due to the community-wide scheme, while also implementing a project to reduce or prevent losses from the insured risk.

  The CRD bond structure innovates by depositing investor funds and premiums into two separate accounts, unlike traditional catastrophe bonds, which combine them into a single collateral account.

Resilience-linked lending refers to a type of financing where loans are tied to specific resilience-building activities or outcomes, such as climate adaptation or disaster risk reduction measures.

Several financial institutions, including JP Morgan, Wells Fargo, and Citibank, to mention a few, have successfully implemented resilience-linked lending strategies over the past years.

However, despite this progress, the industry still faces challenges in accurately assessing and pricing climate risk, largely due to persistent limitations in climate risk data and analytics.

This hinders the widespread adoption of resilience-linked lending strategies.

Some notable examples of resilience-linked lending include:

• Disaster risk reduction loans - Small Business Administration (SBA) disaster loans support disaster risk reduction and management projects in the US.
• Green building Loans - The European Investment Bank's JOO-Green Loan supports the development of green buildings and sustainable urban infrastructure in Finland in 2023.

Climate data is central to identifying emerging risks and opportunities.

Leveraging physical climate risk data can support your assessment of potential climate-related risks and opportunities in various sectors and regions.

For example, new forecasts by the UNSW Institute for Climate Risk & Response (ICRR) found that the global economy could lose up to 40% of its GDP by 2100, as global warming is set to exceed 3 degrees Celsius by that time.

This means that climate change and its impacts are likely to create more uncertainties in the global financial system as well, and identifying new markets will require you to anticipate and capture potential climate risks to have a clearer sight on the opportunities.

To successfully pursue climate adaptation lending, your institution needs to integrate asset-level climate data into both risk modelling and opportunity mapping.

When targeting new markets, consider:

• Physical climate risk data - Using these data to evaluate potential climate risks and opportunities in various sectors and regions.

  As a portfolio manager, you may be often challenged with uncertainties of impact on valuation or difficulty connecting climate risk to property valuation.

  Lukky explains that "asset managers want climate data, but also want to know how it affects portfolio allocation. That translation layer is still missing in most tools".

  In that case, using Climate X's Spectra can help you address these issues by identifying accurately and in real-time physical risks to your portfolio at the asset level.

  For instance, to promote resilience in the built environment, Equans joined forces with Climate X. According to James Graham, Divisional CEO of Digital & Energy Services at Equans UK & Ireland, this collaboration is crucial as the use of Spectra will help firms to "recognise the risk of climate change, adapt to it, and futureproof buildings".

• Market analysis - Analysing climate data to identify areas with high growth potential.
• Targeted products and services - Developing products and services that cater to the needs of climate-resilient industries and communities.

Adaptation finance is emerging as a smart investment pathway, with many financial institutions now offering resilience-linked products that tie returns to measurable climate outcomes.

Investing in resilience can generate significant returns on investment (ROI) for financial institutions.

This can, in turn, help you improve your reputation and attractiveness for environmentally sensitive investors and customers by minimising projected losses from climate disasters and disruptions.

With Climate X's Adapt, for instance, you can identify the best way to maximise your return on investment.

Utilising Adapt's advanced analytics and climate modelling capabilities can enable you to identify specific resilience-building measures that offer the highest ROI, such as upgrading infrastructure, diversifying portfolios, or implementing climate-resilient supply chain practices.

Through data-driven decision-making, you will be able to prioritise investments that not only address climate-related risks but also drive long-term value creation and sustainability.

Some key benefits of investing in resilience include:

• Risk reduction: Climate-resilient investments can reduce potential losses from climate-related disasters and disruptions.
• New revenue streams: Adaptation finance can unlock new revenue streams through innovative products and services.
• Enhanced reputation: Financial institutions that prioritise climate resilience can improve their reputation and attract responsible investors and customers.