4 Ways Banks can approach Adaptation in Sustainable Lending

In a financial landscape increasingly shaped by climate extremes, one statistic stands out: 88% of global banks are still unprepared for climate-related disruptions.

As climate risks intensify and begin to erode portfolio performance, the urgency for decisive action has never been greater. Among the tools available, adaptation finance is emerging not just as a defensive measure, but as a strategic lever, offering banks the chance to mitigate risk while seizing new growth opportunities.

For portfolio managers, it offers more than just downside protection. It’s an opportunity to generate new revenue streams, build long-term value, and align with growing investor demand for sustainable outcomes. Yet, despite its promise, adaptation finance still accounts for less than 10% of market activity.

What’s holding it back is not a lack of interest, but a lack of clarity.

A lack of market standardisation, limited in-house expertise, and insufficient risk data make it hard for banks to scale adaptation strategies. This is also evident as “most banks are not setting adaptation impact metrics,” says Kamil Kluza, Climate X's COO and co-founder, “and few have clear lending strategies that support communities and businesses affected by climate-related disasters.”

Here, we explore how banks can close this gap in four ways: through climate-resilient infrastructure investment, green bonds and loans, blended finance, and better data, thereby transforming climate risk into long-term opportunity.

Banks that invest in climate-resilient infrastructure hold a powerful lever: the ability to shield real assets within their portfolios from intensifying physical climate risks while positioning themselves for strong, long-term returns.

But the absence of market standardisation and reliable data makes this promise harder to realise.

Without consistent metrics, banks struggle to accurately assess the costs and benefits of climate-resilient projects, resulting in unclear investment decisions and patchy portfolio strategies. In effect, the sector is flying blind at a time when precision is critical.

The potential, however, is undeniable.

The World Bank estimates that $1 trillion invested in resilient infrastructure in developing countries could generate $4.2 trillion in benefits. For banks to capture this value, they must embed clear climate resilience ambitions and metrics into green bonds and loans - targeting tangible solutions like climate-resilient building materials and adaptive infrastructure, such as green roofs or sea walls. This not only reduces exposure to climate shocks but also pushes corporate clients to adapt their own assets - unlocking new streams of financial performance and long-term portfolio stability.

Despite the growing use of sustainable lending instruments, most banks continue to treat climate adaptation as an afterthought - at best, a secondary objective folded into broader decarbonisation goals. Rarely is adaptation recognised as a standalone priority. This cautious approach leaves institutions exposed to mounting physical climate risks, undermining the long-term resilience of their portfolios.

Take Nordea, for example. The Nordic lender has pledged to cut absolute financed emissions by 40–50% by 2030, targeting carbon-intensive sectors such as real estate and shipping. Its climate strategy is bold in its mitigation ambitions - prioritising a shift to low-carbon infrastructure - but adaptation remains largely unaddressed.

This mirrors a broader trend across the financial sector, where mitigation dominates the agenda, and critical investments in climate resilience lag behind.

The result: a persistent gap in how banks are preparing infrastructure to withstand the escalating physical impacts of climate change.

Blended finance has emerged as a vital tool for unlocking private sector investment in climate adaptation, an area that remains significantly underfunded despite rising physical risks. By combining concessional capital - such as low-interest loans, grants, or guarantees - with commercial investment, this model helps de-risk adaptation projects and improve their appeal to profit-oriented investors.

Typically structured through public-private partnerships, blended finance creates shared responsibility between governments, development banks, and private actors.

This approach is already enabling the funding of climate-resilient infrastructure, sustainable agriculture, and disaster-prevention systems - offering a pathway to scale climate resilience at pace.

Despite its potential, adaptation continues to take a back seat to mitigation. Since 2013, just $7.5 billion of blended finance has been channelled into adaptation projects, compared with $64.2 billion for mitigation. This imbalance reflects persistent barriers - chief among them a lack of standardised frameworks and reliable data, which makes risk assessment and project evaluation inconsistent across markets. Without these foundational elements, investors remain wary.

Still, the potential is clear: with an estimated $2 trillion adaptation finance gap, blended finance could play a pivotal role in mobilising the capital needed to protect communities, economies, and ecosystems from escalating climate shocks.

A compelling example of adaptation through blended finance is the partnership between the International Finance Corporation (IFC) and Citibank Group, which launched a $2 billion Sustainable Supply Chain Finance (SCF) programme aimed at emerging markets. Designed to unlock access to affordable capital, the initiative leverages IFC’s concessional funding alongside Citibank’s commercial lending capacity, blending resources to mitigate risk and enable wider private sector participation.

At the heart of the programme is a focus on small and medium-sized enterprises (SMEs), often the most exposed to climate shocks, yet the least equipped to adapt.

By improving access to finance for climate-resilient and sustainable practices, the initiative not only fortifies supply chains but also promotes long-term resilience in regions most vulnerable to climate-related disruptions.

It’s a strategic play: one that recognises that adaptation doesn’t happen in isolation but through systemic support across the economic fabric.

For portfolio managers, advanced data analytics are proving to be a decisive tool in reshaping lending practices amid mounting climate risks. By pinpointing high-risk geographies and asset classes, data-driven insights enable the development of targeted strategies that not only mitigate potential financial losses but also uncover untapped market opportunities.

Adjusting lending instruments to incorporate climate risk allows for the creation of innovative products - such as green loans, adaptation-linked bonds, and climate-resilient infrastructure financing - that diversify revenue streams and strengthen portfolio resilience.

The integration of climate risk assessments into credit evaluations helps reduce exposure to vulnerable assets, lowers default rates, and limits costly write-offs.

In doing so, banks position themselves to support high-impact sectors like sustainable agriculture and disaster-prevention infrastructure - areas set to grow in relevance as climate volatility increases. Tools such as Climate X’s Carta, Spectra, and Adapt equip banks with the data needed to operationalise these strategies, turning climate risk management from a compliance exercise into a driver of long-term profitability and competitive advantage.

As climate risks intensify and the physical impacts become harder to ignore, banks are under growing pressure to adapt. Yet, despite the mounting evidence, most sustainable lending efforts still focus overwhelmingly on mitigation. To protect asset values and ensure long-term profitability, climate adaptation must move to the forefront, becoming a core pillar of lending strategies rather than a secondary consideration.

That shift demands more than policy - it requires the right tools.

Prioritising adaptation finance and integrating innovative data solutions, such as Climate X’s advanced analytics, allows banks to better quantify climate-related losses, identify emerging risks, and uncover new commercial opportunities. With accurate, granular insights, financial institutions can position themselves not just to weather the storm, but to thrive through it.

For portfolio managers, this is both a challenge and a chance to lead. By embedding adaptation into the heart of lending decisions, supported by robust data and purpose-built financial instruments, banks can deliver long-term resilience for real assets. In doing so, they stand to unlock enduring financial returns - while reinforcing their role in building a more climate-ready economy.