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Despite mounting climate disasters, companies slow to heed U.N. call to fund adaptation
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Until now mitigation has been the main focus of global efforts to tackle climate change, cutting emissions by investing in technologies such as renewable energy, electric vehicles and energy efficiency.
But the extreme weather events of the past few years, from wildfires in Australia and the United States to devastating floods in Pakistan and record-breaking heatwaves in India, have starkly illustrated that the adaptation agenda can no longer be put off for a later day.
The impacts of climate change are being felt now, and will only get worse. Research from BlueDot, a disease intelligence company, says that climate change is likely to turn cities like New York, Toronto and London into breeding grounds for mosquitoes carrying dengue, yellow fever and Zika over the next 10 years, for example.
And while the view was that climate-related disasters were not really a business issue – people were affected, but not companies – there’s a growing appreciation that those people are employees, suppliers and customers.
In 2022, Pakistan’s floods washed away hundreds of thousands of tonnes of export crops such as rice and wheat, while water levels in one of Europe’s main transport arteries, the Rhine, fell to such low levels that ships were unable navigate it. Meanwhile, factories were shuttered in China due to drought-curtailed hydropower production. Among those affected were Toyota, VW and Foxconn.
“Adaptation is about understanding all the risks that climate change can produce in your entire value chain, both from a long-term pattern point of view (changes in sea levels, changes in weather or rain patterns) to short-term shocks such as floods and fires,” says Jose Maria Ortiz, head of impact investment at Palladium.
“The key issue for business when it comes to climate change adaptation is that it is overwhelming. Almost every element of the value chain is vulnerable, and many businesses do not even know how to evaluate the impact, let alone manage it.”
Parts of China sees record-breaking temperatures
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Analysis from the Journal of Business Research has found that 70% of businesses worldwide are exposed to unexpected extreme weather events that have an impact on their profitability.
“Investing in climate change adaptation is a must for businesses because climate change risks are not going away. They are long term and will likely become worse,” points out Professor Simone Varotto, professor of finance at Henley Business School.
The most recent United Nations climate meeting, COP27, saw the launch of the Sharm el-Sheikh Adaptation Agenda, which calls for action to protect the most vulnerable communities across five “impact systems”: food and agriculture; water and nature; coastal and oceans; human settlements; and infrastructure.
Yet when it comes to funding, adaptation remains “the poor relation of climate finance”, says Antoine Poincare, head of Axa’s Climate School, which helps teach businesses about climate risks. The U.N. Environment Programme (UNEP) has warned about the widening financing gap for adaptation. “International adaptation finance flows to developing countries are five to 10 times below estimated needs, and the gap is widening. Estimated annual adaptation needs are $160 billion to $340 billion by 2030 and $315 billion to $565 billion by 2050.”
Implementation of adaptation actions – concentrated in agriculture, water, ecosystems and cross-cutting sectors – is increasing, UNEP adds. “However, without a step-change in support, adaptation actions could be outstripped by accelerating climate risks, which would further widen the adaptation implementation gap.”
One key reason for the gap is that virtually all the money going into adaptation today is coming from the public sector.
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“There is very little private funding of any type going into adaptation – or even being thought about,” says Stella Whittaker, PhD research fellow at Copenhagen Business School, who has been researching adaptation funding.
This is partly because so many adaptation projects are infrastructure-related. “There is a very strong belief that this is a public-sector issue,” she adds. “The role of the private sector needs to be more clearly articulated.”
Typically, banks are looking at transition risks, not physical risks, says Poincare. “They assume insurance companies will take the load. But increasingly, insurers are saying these are risks they can no longer take. We can no longer count on insurers mutualising these risks for us.”
Another issue is that adaptation is often expensive, and doesn’t lend itself to an income stream or payback that investors can evaluate, Whittaker says. Nor is it easy to value the adaptation benefits from individual investments.”
In addition, it is very hard to predict where impacts will fall, making it more challenging to make the case for spending money. Adaptation spending requires “investment that may never yield a return,” points out Steve Crolius, president of Carbon Neutral Consulting and a former climate adviser to President Clinton. “Companies that take proactive measures will be rewarded if a 100-year storm or an unprecedented wildfire levels a plant but they will be punished as long as disaster does not strike.”
The need for private sector capital is clear, Whittaker points out, because the public sector cannot provide funding at the scale that is needed, particularly given the cost-of-living crisis and other demands on the public purse. Much of the burden falls on local governments, which are even less able to fund such projects than central governments. One model that could encourage private sector investment is the U.S. municipal bonds market, where the money raised is often used for infrastructure.
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Companies looking to invest in adaptation need to evaluate their entire value chain, from raw materials to end customers to identify where they are most vulnerable to climate risks. It is not always easy to decide how to mitigate these risks, says Alexandra Mihailescu Cichon, executive vice-president of sales and marketing at RepRisk. ”Moving operations from one place to another or retrofitting buildings can be time-consuming and expensive.”
And just moving away from a risky site can have serious consequences for the local community, so there is a just transition element for companies to consider.
Ben Essen, of brand consultancy Iris, says companies will need to collaborate “with suppliers, customers, regulators and even competitors to transform not just their own companies but the entire system they operate in”. He cites the example of Budweiser, which recently set up an initiative to bulk-buy renewable energy for the bars that sell its beer.
The World Economic Forum says adaptation could be a $2 trillion market by 2026, but the opportunity is largely untapped. “Only 1.6% of all adaptation funding comes from private investment”. Investors will need co-investors from government or multilateral development banks to give them the confidence to commit their funds.
However, Standard Chartered says adaptation investing is excellent value for money, estimating that every dollar invested in adaptation produces a return of $12. “There is a genuine, smart business case for investing in adaptation now,” says Emma Cox, global climate leader at PwC. And the earlier companies invest the better, because the more resilient they are, the greater the costs that will be avoided in future. “Thinking about that now will have a multiplier effect in decades to come.” But, she says: “Business is still in the foothills when it comes to getting to grips with adaptation.”
Nonetheless, an increased focus on adaptation is an imperative for companies in the years to come. “Investors want to see that companies have a plan that aligns with their business model and overall strategy,” says Cichon of RepRisk. “Companies that are not taking such an approach will look like they are not future-proofing themselves.”
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