Climate adaptation and mitigation as a lens for outperforming investment

Climate adaptation measures are often viewed as costly expenses to be reluctantly shouldered by the public sector (flood barriers on the Thames or firefighting infrastructure in California come to mind). However, a compelling case exists for climate adaptation and resilience strategies to generate strong investment returns.

A recent World Resources Institute (WRI) paper introduces a “triple dividend” framework for evaluating climate adaptation investments. It identifies three key benefits: preventing losses (first dividend), fostering economic growth (second dividend), and delivering social and environmental gains (third dividend).

The authors argue that every US$1 invested in adaptation is expected to yield over $10.50 in benefits over a 10-year period. The evaluated investments, totaling $133 billion, could generate $1.4 trillion in benefits, with average returns of 27 percent.

The study highlights that over half of the value from these investments does not depend on climate-related disasters occurring. For example, sustainable agriculture and forestry investments yield returns through increased crop yields, poverty reduction, and enhanced economic productivity.

While adaptation funding, primarily through multilateral development banks, doubled from 2018 to 2022, a significant investment gap persists. According to a 2024 United Nations Environment Programme (UNEP) report, this gap ranges between $187 billion and $359 billion annually.

Investors seeking to incorporate climate risk and adaptation into an investment thesis may find value in the work of the Woodwell Institute, a leader in actionable climate risk analysis. The institute has partnered with Wellington Asset Management and the California Public Employees’ Retirement System (CalPERS) to develop the P-ROCC (Physical Risks of Climate Change) framework, which aims to enhance investment decisions through improved corporate disclosures.

Improved understanding and disclosure of physical climate risks offer companies several benefits:

• Demonstrating preparedness: Showing investors that climate risks are taken seriously reduces perceptions of unpreparedness, which can affect stock price volatility, cost of capital, confidence in management, and litigation risks.

• Meeting disclosure requirements: Enhanced disclosures help companies comply with new regulatory standards.

• Adapting operations: Recognizing the impacts of climate change on operations and demonstrating the return on investment from resilience and Net Zero activities, such as reduced operational costs.

  
  

Climate resilience and adaptation are often conflated with broader ESG (Environmental, Social, Governance) investing, which remains poorly understood and embroiled in high-profile culture wars, particularly in U.S. markets.

Skeptical investors might consider the perspective of leading insurers, such as Swiss Re, which integrate sophisticated climate resilience analyses into premium calculations, undeterred by political debates. Insurers increasingly reference the Task Force on Climate-related Financial Disclosures (TCFD) framework and the United Nations Environment Programme Finance Initiative (UNEP FI) for guidance on reporting climate risks.

If agricultural land or coastal real estate in a portfolio becomes uninsurable due to risks like drought or coastal erosion, a lack of foresight on climate risk could be disastrous for asset owners. Not only will they fail to reap the benefits of climate adaptation, they may find the value of their assets dropping to zero.