The Race to Climate Change Adaptation

The Race to Climate Change Adaptation

The economic benefits of embracing climate change are clear – research from the Global Commission on Adaptation found that investing $1.8 trillion globally between 2020 and 2030 could reap net economic benefits of up to $7.1 trillion.

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With the COP27 Conference recently drawing to a close, it is now becoming abundantly clear the effects of climate change are set to become more and more pronounced across the world. As governments, populations and companies face greater pressure to adapt to the planet’s changing environmental concerns, the deficit in funding and the need for support for adaptation is becoming rather crucial. With regard to this, a study from consulting giant AT Kearney recently found:

“More than 90% of the $632 billion in global climate financial flows in 2019 went toward mitigation, leaving only around $60 billion for adaptation. Yet, the demand for adaptation stands to rise considerably. Annual adaptation costs in the developing world alone are projected to increase from $56 billion to $73 billion today to $160 billion to $340 billion in 2030. Further, adaptation finance flows to the developing world reached only $29 billion in 2020, a slight 4% increase from 2019.”

Figure 1: Climate change adaptation cost; Image source: AT Kearney

Building momentum for climate resilience

A major burden of climate change adaptation costs is set to fall on developing countries, which, albeit responsible for only a small fraction of global emissions, is set to be impacted rather disproportionately. To this end, climate change agendas appeared as top priorities in the World Bank and IMF fall meetings. In fact, the World Bank has even sanctioned a $650 billion long-term lending facility to support ‘climate resilience’, with ten major economies, including Germany and the United States, calling for a major restructuring of the Bank. Kearney writes:

“While momentum is building among wealthier countries to act on climate resilience in developing parts of the world, whether these countries can significantly boost spending in the coming years remains to be seen. Political hurdles as well as lasting economic headwinds may slow these ambitions in the near term.”

The economic benefits of embracing climate change are clear – research from the Global Commission on Adaptation found that investing $1.8 trillion globally between 2020 and 2030 could reap net economic benefits of up to $7.1 trillion. Experts at Kearney write, “businesses that do adapt will better protect themselves against the risks that climate-related disruptions pose to their operations while simultaneously benefiting society and demonstrating the ESG leadership that consumers value.”

Business costs of Climate Inaction

As businesses become more and more aware of both the positives of embracing adaptation and the risks of failing to act on it, they are now in a position to embrace the significant opportunities to forward-position themselves with adaptation solutions and innovations to stay competitive over the long run. Estimates from the Bank of America expect the value of the climate change adaptation market to double to $2 trillion annually by 2026.

The costs of inaction are considerable as well. In 2018, for example, a study conducted by global non-profit CDP Worldwide found that 215 of the world’s largest firms reported a loss of nearly $1 trillion in climate-related financial risks. California-based Pacific Gas and Electric Company (PG&E) was famously one of the world’s first ‘climate bankruptcies’, facing an estimated $30 billion in liabilities and about 750 lawsuits from wildfires caused potentially by their power lines amidst drought conditions. Experts at AT Kearney opine:

“The various risks posed by climate change present compelling adaptation opportunities for businesses. Rising temperatures and wildfire risks, for example, drive the need for adaptation solutions in cooling and air conditioning, electric grid resiliency, and fire-resistant materials. Water resources, increasingly threatened by climatic changes, also require creative management solutions to mitigate supply disruptions. These include desalination, wastewater treatment, and IoT-based smart metering to control water use. Some innovative companies are already taking the lead in devising and implementing the adaptation solutions needed to cope with climate change, though significant opportunities for further innovation and growth in this area remain.”

Figure 2: Climate risk opportunities; Image source: AT Kearney

Business Implications

Over the coming half a decade, businesses and governments alike are set to face mounting challenges to address climate disruptions. However, the path to addressing the deficit in adaptation costs is set to face additional headwinds in the form of geopolitical tensions, political polarisation, and worsening misinformation.

  • Companies acting first are set to gain as early movers in a fast-evolving area:Businesses must take advantage of the rise of demand and development of new markets for adaptation solutions and protecting one’s organisation against climate disruptions. For example, Kearney reports, “the European Bank for Reconstruction and Development, supported by BNP Paribas and Goldman Sachs, raised $700 million through the world’s first dedicated climate resilience bond, capitalising on an emerging market for climate resilient projects.”
  • Climate risks could dramatically reshape supply chains:A recent study from the University of Maryland and supply chain technology firm Resilinc found that only 11% of the approximately 12,000 supplier sites in China, Taiwan and the United States are prepared for climate disruptions. Strategic businesses, in this regard, could take action by prioritising the development of climate-resilient infrastructure, increasing inventory, diversifying supply sources and upgrading insurance policies.
  • Making adaptation central to business operations:AT Kearney reports that strategic companies are set to not only increase environmental focus, but also consider new adaptation-facing roles either expanded from existing positions or newly created.

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