October 2023
October 2023

As published on FS Sustainability

Investing in climate mitigation is still a key priority, but investing in adaptation and resilience to the physical damages and disruption of climate change is lagging behind.

But new focus from investors, companies and government on investing in building resilience means this is a rising priority as well as an economy-wide challenge.

The most recent Intergenerational Report focused heavily on climate action, with a new focus on the physical impacts both now and towards 2050.

"Some costs related to the physical risks of climate change are already unavoidable," the report said. "Sustained action across adaptation and emissions reduction will be required to maintain productivity and fiscal sustainability as well as achieve better social and environmental outcomes. Effective investments in resilience will also reduce costs to the economy in the long run."

Investors are taking note - recently, the Investor Group on Climate Change launched Road to Resilience, which outlines a two-year strategy designed to support investors to drive "economy-wide adaptation and resilience to the physical damages and disruption of climate change." IGCC cited similar direct impacts to the Intergenerational report while also highlighting indirect impacts including disruptions to supply chains that interrupt business, more expensive or unavailable insurance and worse overall economic conditions.

The IGCC strategy notes that there are barriers to private investment in adaptation, and the fact that government alone cannot pay for adaptation and will require "proactive" investment in adaptation and resilience that is both a necessity and an opportunity for institutional investors.

Q&A with Bahador Tari, general manager - strategy, Energetics

Q: How does Energetics define climate resilience and climate adaptation and why is it so strategically important for companies and investors?

A: As physical and transition risks materialise, corporates will become increasingly vulnerable to value erosion. 'Climate resilient' businesses are likely to be those which have anticipated the potential impacts of climate risks on their business model and stress tested their strategy to ensure they are well positioned to manage these risks to avoid adverse financial performance (as well as capitalising on any upside).

Q: Is building strategy around resilience and adaptation an either/or with mitigation activity?

A: Increasingly, there is market recognition that net zero plans are vulnerable to the physical impacts of climate change (e.g., asset performance) and interdependencies between mitigation and adaptation need to be better understood. An integrated approach to climate risk management that would enhance the value and credibility of an organisation's climate transition plan.

Q: What are the key challenges to effective investment in resilience and adaptation?

A: The challenges presented by a changing climate are highly complex and difficult to demonstrate. The largest challenge facing investors and businesses is they're not sufficiently informed about the materiality of the impacts presented by climate change throughout their value chain. Combined with high costs of adaptation, obscure and/or long term ROIs and modelling complexities, building a business case for investment in resilience opportunities can prove challenging.

Q: How do you work with clients - both investors and businesses to analyse how they should allocate capital?

A: Our approach is to partner with our clients to enhance their understanding of potential climate impacts on their market position and performance and ultimately develop a climate resilience strategy that enables them to align their capital allocation and investment evaluation decisions with their key climate-related risks and opportunities, including investments in sustainable solutions, emerging technologies, renewable energy, and/or low-carbon products.

Q: This adaptation process can't happen in isolation - how should investors and companies think about systemic engagement (government policy, regulation, etc) on adaptation and resilience?

A: Climate change initiatives, including adaptation, require broad cooperation and collaboration across the public, private, and financial sectors.  Our experience shows that boards, along with company management and investors, expect public-private partnerships to play a more prevalent role in addressing climate resilience. Increasingly, we are also observing organisations seeking to work more closely with their supply chain partners and customers to find innovative ways to address climate risk.

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