Sink, Swim or Adapt

Adaptation bonds are among the potential vehicles for private investment, but policy action is still needed at COP28. 

The UN Environment Programme’s (UNEP) 2023 Emissions Gap Report – aptly titled ‘Broken Record’ – clearly states that the world is a long way from limiting global warming to 1.5°C by 2050, despite ongoing efforts to mitigate climate-related risks.  

The realities of an already warmer planet have never been clearer than this year, from wildfires in Canada to severe flooding in Libya 

If we can’t (or won’t) sufficiently mitigate climate-related risks, then humankind urgently needs to adapt to cope with the consequences.  

“Climate adaptation is imperative because it addresses the immediate and long-term impacts of climate change, which are already affecting communities, businesses, and ecosystems worldwide,” Jane Goodland, Head of Sustainability at the London Stock Exchange Group (LSEG), tells ESG Investor. 

Not only imperative, adaptation may also be remunerative. Remco Fischer, Climate Lead at the UN Environment Programme Finance Initiative (UNEP FI), notes that investing in adaptation “could bring opportunities for the private sector”. 

“First movers could reap the benefits from a market worth an estimated US$2 trillion per year by 2026, especially as climate impacts become increasingly intense and frequent,” he says. 

Indeed, there is already growing appetite among investors to channel investments into climate adaptation, with some highlighting the appeal of new, innovative products, such as adaptation bonds.  

“[Sustainability] adaptation-linked bonds, which are in some way supported by governments, could lend themselves very well to [the needs of] institutional investors compared to simply financing the required infrastructure directly,” says Gustave Loriot, Responsible Investment Manager at UK local government pension scheme London CIV.  

Last year, a paper published by Imperial College Business School outlined the benefits of creating an adaptation bond asset class which is dedicated to funding climate adaptation and resilience projects.  

Styled on the US municipal bond market, these bonds could expand needed financing across several types of infrastructure project, such as improving energy efficiency of buildings, shoring up flood and storm surge defences, and installing water provision systems.  

Although not yet a widespread practice among governments, some countries – like the UK and China – are increasingly putting money behind this idea, with varying levels of success.  

Plugging the gap  

But adaptation bonds are just one way in which to plug the climate adaptation finance gap, which is wider than ever before, according to the UNEP 2023 Adaptation Gap Report, released earlier this month. 

The report estimates that the climate adaptation finance needs of developing countries are ten to 18 times larger than existing international public flows – over 50% higher than previous predictions. The total financing gap stands at between US$194-US$366 billion a year. 

UNEP further noted that adaptation-focused finance flows from the private sector have decreased since 2021, despite the fact climate adaptation has become a priority item on the COP agenda, with COP27 witnessing the publication of the Sharm El Sheikh Adaptation Agenda, which sets out 30 adaptation goals to be achieved by 2030. 

“We expected the Adaptation Agenda to take centre stage in Egypt, however, the tangible outcomes were scarce,” admits Albertine Pegrum-Haram, Senior Associate of Responsible Investment at Columbia Threadneedle Investments.  

While countries agreed on the framework, which was based on a COP26 pledge to at least double adaptation finance to US$40 billion by 2025, Pegrum-Haram points out that a “shift in language saw the emphasis removed from the funding to negotiators agreeing to produce a report for COP28 on the progress towards adaptation”.  

At COP28, investors are keen for barriers limiting private sector investments in adaptation-focused solutions to be discussed and addressed on the international stage.  

“The range of tools available is very large, spanning proactive policies and regulatory requirements, renewable energy subsidies, meaningful adaptation funding, community engagement and capacity-building, promoting transparency, and innovation programmes,” says Oliver Marchand, Head of Climate Research at global data provider MSCI.  


The first step to scaling private capital flows into climate adaptation is increasing clarity and cohesion at the government level. 

But progress on global adaptation commitments since COP27 has been “uneven”, according to Goodland from LSEG.  

She notes that some governments have taken “significant steps”, but overall action is “not matching the urgency of the situation”.   

The US’ fifth national climate assessment recently identified an increase in adaptation actions across the country, albeit acknowledging current efforts and investment are “insufficient”. Potential actions to accelerate adaptation-focused progress include implementing nature-based solutions, applying innovative agricultural practices to manage increasing drought risk, and developing urban heat plans to reduce health risks from extreme heat.  

Following the publication of its National Climate Adaptation Strategy 2035, the Chinese government has called for more applications from cities to become “climate-adaptive pilot cities” and for existing pilot cities to elevate their status to “advanced pilots” by renewing their adaptation strategies and consolidating lessons learned. 

But it’s the UN Climate Change’s recent reports, which provide updated assessments of governments’ nationally determined contributions (NDCs), NAPs and long-term low-emission development strategies (LT-LEDS), that are the most telling.  

The ‘2023 NDC Synthesis Report’ said that more NDCs (81%) contain adaptation-related information than ever before, including outlines of vulnerabilities and sectoral adaptation measures.  

Agriculture has been identified as a priority sector, the synthesis report said, either explicitly or as part of cross-sectoral adaptation efforts, with most aiming to use mitigation opportunities in the sector.  

Progress on NAPs is more limited but nonetheless encouraging. Twenty-four percent of assessed countries said they have developed a NAP, and 46% intend to do so in the near future. Thirty-four percent of NDCs outlined time-bound and quantitative adaptation targets, with 16% reporting plans to develop an indicator framework to monitor progress.  

Pegrum-Haram says that many NAPs “lack details on costs and implementation”. 

“More detailed NAPs focused on investable opportunities could help drive private capital to the right projects,” she adds.  

The third edition of FTSE Russell’s Net Zero Atlas also noted that Group of 20 (G20) governments’ national adaptation plans (NAPs) are not effective enough to meet the scale and complexity of escalating physical climate risks. 

The ‘2023 LT-LEDS Synthesis Report’ said that 97% of assessed LT-LEDS include adaptation-related information. While 34% of LT-LEDS included quantitative targets covering priority sectors, 66% included sectoral adaptation actions “without quantifiable information that would allow monitoring of adaptation progress”.  

Gerbrand Haverkamp, Executive Director of the World Benchmarking Alliance (WBA), tells ESG Investor that governments now need to articulate what they expect from companies on climate adaptation.  

“It is well understood that there is a clear role for finance and companies, but no one has articulated what the actual responsibility of companies is [on adaptation].” 

According to Haverkamp, if there is no clear messaging on what the responsibilities of companies should be, then it becomes “very problematic” for investors to try to hold them accountable on it.  

In December 2022, the Asia Investor Group on Climate Change (AIGCC) published an outline of investor requirements of NAPs determined by its members. Governments were encouraged to ensure corporates publish decision-useful information on their exposure to physical climate-related risks to help investors to determine the adaptive capacity of companies. 

Waiting on definitions  

A key question remains for investors interested in supporting global climate adaptation efforts: What can be classified as an adaptation-focused activity or solution?  

“One reason for the [adaptation funding gap] is a lack of clarity on what adaptation activities look like, and we hope that the COP28 outcomes can drive a clearer consensus,” says Pegrum-Haram, adding that this needs to be paired with adaptation funding from governments to give investors “visibility into project viability” and the potential return on investments.  

Earlier this month, pensions, savings and insurance provider Phoenix Group unveiled a report outlining ways to incentivise private investment in climate solutions. At a briefing discussing the report, Head of Climate and Nature Bruno Gardner noted that climate adaptation-focused investment solutions remain “nascent”.  

Investors need “policy certainty” on defining adaptation through “usable taxonomies or ‘menus’ of adaptation-aligned technologies, activities or actions at the sector and sub-sector level”, says UNEP FI’s Fischer. Investors would also welcome better access to data on climate hazards and sectoral vulnerabilities, as well as strong project pipelines and financial solutions to “balance risk over the long term”.  

There are a range of new, albeit small, adaptation-focused solutions emerging, such as AI for seeds for farmers based in drier, hotter climates, and floating gardens in Bangladesh.  

But investors also need to be comfortable working with corporate data on climate-related physical risks and strategies and/or progress addressing them.  

“Investors have made huge progress over the last decade in understanding physical risk […] especially in terms of damage functions and asset location databases – the coverage, accuracy and granularity is increasing constantly,” says Marchand from MSCI. However, he notes there are notable gaps in mapping indirect risks from the spatial vicinity and understanding tipping points. 

Pegrum-Haram calls for a clearer industry understanding of models being used in physical risk management and “an acknowledgement of the limits of using climate model outputs as investment relevant data”.  

“Currently, most climate models used to guide investment decisions were designed for academic research, and the outputs are not necessarily fit-for-purpose in designating finance to resilience and adaptation,” she says.  

Timothée Jaulin, Head of ESG Development and Advocacy, Special Operations, at Amundi Asset Management, says investors have “seen progress” engaging with sovereigns on both climate mitigation and adaptation themes, including physical climate risks, through platforms like Assessing Sovereign Climate-related Opportunities and Risks (ASCOR) 

However, he admits that it remains more challenging at a company level. 

“Rather than identifying opportunities, I think it’s more a question of identifying portfolio hotspots [for physical risks],” says Loriot from London CIV, noting that investors can then engage with the investee companies within those ‘hotspots’ to ensure they have a clear resilience plan in place. 

To support investors in securing physical risk-related data from companies, in 2021 the Institutional Investors Group on Climate Change (IIGCC) set out minimum disclosure expectations of companies and a request for them to develop resilience plans alongside transition plans. 

“We are also developing the Physical Climate Risk Assessment Methodology 2.0 (PCRAM 2.0), and integrating it into our Climate Resilience Investment Framework,” says Danielle Boyd, Head of Climate Strategy Implementation at the IIGCC. 

Understanding of a portfolio’s exposure to physical risks is especially important when it is then applied to emerging markets and developing economies (EMDEs) 

Goodland points to “inadequate infrastructure, regulatory uncertainties, and limited access to reliable climate data” across EMDEs.  

This is compounded by “high interest rates, inflationary pressures and low growth [which] have dampened long-term investments in EMDEs in particular”, adds Fischer.  

A “multi-faceted approach” is needed, Goodland says, including enhancing climate data collection and tailoring risk assessments to the specific challenges across EMDEs.  

New tools 

Financial innovation is a must.  

Despite the recognition of adaptation’s importance, there is still a lack of robust funding mechanisms and clear pathways for implementation,” says Goodland. 

As well as climate adaptation bonds, blended finance mechanisms can incentivise private sector investment, particularly in EMDEs.  

Earlier this month, COP27’s UN Climate Change High-Level Champion claimed COP28 will more explicitly explore climate adaptation investment opportunities for public-private partnerships. 

Prime Minister of Barbados Mia Mottley, who steered the Bridgetown Agenda, has outlined her intention to convene actors from the private and public sector to create viable contractual frameworks for blended finance deals ahead of COP. 

“There’s still the question of how financing in adaptation is actually generating a return, because it’s currently quite elusive how improving the resilience of communities or specific infrastructure generates [financial] returns – there’s not a clear causal relationship and it would be quite hard to estimate one,” says London CIV’s Loriot. 

“Government has a role in creating products that can subsidise resilience.”  

More granular tools for investors are needed. UNEP FI is working with development finance institutions and impact investors through the Adaptation and Resilience Investors Collaborative to develop the tools necessary to scale finance for adaptation. 

In particular, investors need support grappling with the localised nature of adaptation-related risks, says Vicky Sins, WBA’s Decarbonisation and Energy Transformation Lead. 

“Even though climate adaptation goals are determined at a global level, they need to be translated and executed across specific regions and sectors,” she adds. 


Although it made some steps, COP27 left a lot to be desired on climate adaptation, and investors and industry experts speaking to ESG Investor are keen for COP28 to move the dial.  

COP28 must build on the momentum generated at COP27, Goodland from LSEG says, and unveil “concrete actions and commitments” to accelerate progress. 

According to UNEP FI’s Fischer, COP28 should see the formal launch of the Global Goal on Adaptation, which will provide a global framework for greater accountability on planning and financing for adaptation, as well as assessing the impact of adaptation interventions.  

Additionally, the first Global Stocktake, designed to assess countries’ progress toward the goals of the Paris Agreement, will “include a call for the integration of more effective adaptation plans in NDCs, including a specific focus on food and land use”, says Fischer.  

“In terms of actual deliverables, it’s unlikely that there will be anything more than further reaffirmation of the need to double adaptation finance, but private finance is likely to take a more central role in discussions,” he adds. 

Pegrum-Haram from Columbia Threadneedle Investments remains uncertain on how much progress will be made on climate adaptation in the near term.  

“There has been muted progress and tense negotiations in the run up to COP28, which shows that there are still fundamental disagreements between parties on what shape the Adaptation Agenda should take,” she says, noting that this underscores the “complicated nature of defining [context-specific] adaptation goals”. 

Crucially, investors and other stakeholders must not view climate mitigation and adaptation as separate issues. 

“We are not on track to limit climate impacts, so physical risks are a predictable outcome for investors to consider,” says Pegrum-Haram, adding that “the most powerful way to limit the most damaging impacts of climate change is to limit emissions”.  

“It is abundantly clear that adaptation and mitigation finance go hand-in-hand, and that both the transition and adaptation finance gaps need to be plugged,” she says.

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