Failing to invest the very bare minimum required to withstand predicted climate damage could cost emerging nations hundreds of billions of dollars in losses and missing GDP development this decade. Anika Sidhika writes

Based on research from Adaptation Economy and Standard Chartered, which examines the need for climate adaptation investment in ten countries, if these markets do not invest at least $30bn in adaptation by 2030, they will suffer $377bn in losses and lost GDP growth.

The projection assumes that global temperature increases will be limited to 1.5°C in accordance with the Paris Agreement. In a 3.5°C scenario, the estimated minimal investment required more than doubles to $62bn, with significant losses if no investment is made.

According to recent Standard Chartered research, Bangladesh, China, Egypt, India, Indonesia, Kenya, Nigeria, Pakistan, the United Arab Emirates, and Vietnam are among the markets where action is critical, either because of their size and importance to global or regional economies, or because they are particularly vulnerable to extreme weather events.

Drought-resistant crops, early warning systems for impending natural disasters, and coastal barrier protection solutions for flood-prone areas are examples of climate adaptation projects.

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By GlobalData

India is expected to profit the most from adaptation investment of the ten markets studied.

In a scenario of global warming of 1.5°C, the market would need to invest an estimated $11bn to prevent climate damages and lost growth of $135.5bn, which would result in a thirteen-to-one return on investment for the Indian economy.

Meanwhile, China could save an estimated $112bn by investing only $8bn. Kenya could save an estimated $2bn by investing $200m in adaptation.

Global financial side

Even if the world's nations meet the Paris Agreement's goals, climate change adaptation measures must be pursued alongside the global decarbonisation programme, with the banking sector playing a vital role in unlocking funds. 

To date, global financial markets have mostly focused on financing climate change mitigation, while the crucial need to adapt to our changing environmental reality has received less attention. The Adaptation Economy study throws light on the unexplored aspect of the climate-finance interaction.

The results demonstrate that 0.4% of their money is devoted to adaptation projects in emerging economies, which helps to understand the global financial community's appetite to finance climate adaptation initiatives and to identify any hurdles to investment. Bankers, investors, and asset managers were polled on this. According to the findings, 0.19% of capital is invested in adaptation in Asia, 0.07% in the Middle East, and 0.03% in Africa.

Increasing focus on the adaptation economy

The Standard Chartered report demonstrates that adaptation is moving up the agenda, despite the fact that investment flows are now modest. Climate adaptation finance, according to 73% of banks, asset managers, and investors, will become widely used in 2023, and adaptation is "the next big thing" in ESG. 

The largest financial institutions in the world are also recognising the opportunity that climate adaptation offers; 77% of those asked said it was a strategic emphasis, and 68% were actively developing plans for adaptation finance and investment. 

“This report makes it clear that irrespective of efforts to keep global warming as close to 1.5C as possible we are going to have to incorporate climate-warming effects into our systems and adapt to its reality,’’ said Marisa Drew, chief sustainability officer of Standard Chartered. “All nations will need to adapt to climate change by building more resilient agriculture, industry and infrastructure, but the need is greatest in emerging and fast-developing economies with a disproportionate risk of exposure to the negative effects of rising temperatures and extreme weather.” 

She added: “We must urgently recognise that adaptation is a shared necessity, and as our Adaptation Economy research so effectively highlights, inaction creates a shared societal burden of exponentially increasing cost. The financial sector has a crucial role to play in directing capital towards adaptation and creating the proof points to demonstrate that investing in adaptation can be a commercially viable attractive proposition for the private sector.”

Unravelling the adaptation economy

For this growth to occur, there must be cooperation between the public and private sectors. Nearly seven in ten (69%) of the firms surveyed believe that government intervention is necessary to convert the economic benefits of adaptation into commercial returns for investors. Firms also believe that public-private partnerships will be essential to facilitating adaptation investment in emerging markets (67%). 

Banks, investors, and asset managers are also urging financial sector innovation: many feel that whole new products, such as adaptation bonds, would be required to attract the necessary capital for climate adaptation. Financial firms also cite a lack of awareness and uncertainty as major barriers to contributing more funding to climate adaptation programmes in general, and particularly in emerging regions.

What prospects does adaptation bring for investors?

Alex Kennedy, head of sustainable financial solutions at Standard Chartered, answers the question: ‘’Adaptation is the opposite, it is spending money to protect ourselves from a threat that may come unannounced, it is amorphous and intangible. What adaptation does that mitigation does not is that it builds resilience – and in the changing fortunes of time, as the negative effects of climate change become more and more real, resilience feels incredibly important to me. 

“Adaptation is the opposite, it is spending money to protect ourselves from a threat that may come unannounced, it is amorphous and intangible. What adaptation does that mitigation does not is that it builds resilience – and in the changing fortunes of time, as the negative effects of climate change become more and more real, resilience feels incredibly important to me.’’ 

Climate change and decarbonisation, the digital revolution, and sustainable lifestyles are long-term trends that signal optimism for private equity and venture capital, according to GlobalData experts.