How Businesses Can Meet The Climate Risk And Adaptation Finance Gap

Many businesses are now having to grapple with climate-related risks, like heatwaves and heavy rainfall, and perhaps more importantly how to finance mitigation measures.

The issue has been highlighted in a recent report by the Imperial Business School’s Centre for Climate Finance and Investment, which looks at how businesses can mitigate environmental risks, and possible avenues for finance.

The report comes as separate research shows that businesses could be underestimating investor losses from physical climate risks by as much as 70% rising to 82% when extreme risks such as cyclones and floods are also taken into account.

The Imperial analysis argues without substantial investments in adaptation, urban areas, their economies, infrastructure, and inhabitants face significant vulnerability to climate-induced extreme events, resulting in substantial costs.

And as climate change does not impact the population in the same way, it is critical to identify those who are most exposed and vulnerable to climate hazards.

But the study also claims London lags behind other cities, such as Singapore and Copenhagen, in its adaptation financing efforts.

Professor Michael Wilkins, from the Imperial Business School, said there is a large gap between estimated climate adaptation needs based on future projections and what is being financed at the moment, in an interview.

Professor Wilkins globally around $70 billion of financing is being allocated to climate adaptation work, but it needs to be in the region of $300 billion per year.

In the case of the U.K, he told me the cost of adapting infrastructure to make it resilient to future climate impacts is estimated to be between £5 billion and £10 billion per year, but less than £1 billion is currently being spent.

Professor Wilkins said ageing infrastructure, particularly in the water sector, also makes it harder to estimate the full cost of climate adaption in the U.K.

“The UK still, to a very large extent, underestimates the adaptation issues it faces in the future,” he said.

He said many of the costs have been assessed in a fragmented manner and there has also a lack of recognition of “locked-in” costs, which are the costs of caused by how the climate is set to change over the next two decades.

“We’ve got to a stage now where even if we spend lots of money building new climate mitigation projects, they are not going to reduce the impact of climate change in the short-term, because of the existing amount of carbon in the atmosphere causing these changes,” he added.

Professor Wilkins said other countries have addressed financing climate adaption in a more standardised and unified way, as well as considering the social and economic impact of severe climate impacts

He cited the example of Singapore, which has put together a number of framework plans for addressing sea water surges due to tropical cyclones, which has led to more resilient infrastructure being built.

“If you look at climate resilience financing as a public good in the same way as you think about health and education as a public good, then you can actually add it to the country’s tax base,” he told me.

“If health and education is paid by the taxpayer, then why shouldn’t protecting yourself against climate also be paid for by the taxpayer, given that it’s actually providing a public benefit.”

Lorenzo Saa, chief sustainability officer at Clarity AI, said there is a growing sense among corporations and investors that climate mitigation on its own is not enough any longer, in an interview.

Saa added businesses need to focus on adaptation, because climate risks are being felt today, but he said there are several factors involved in bridging the funding gap for such measures.

He also highlighted the growing role asset management can play in identifying resilience solutions, and the importance of corporate data to understand climate impacts.

“Blended finance is clearly a big part of the conversation, because it has so many instruments, like guarantees or concessional capital to help de-risk investments for private investors, and I think it will be a critical component of this year’s COP30 talks in Brazil,” he told me.

“But there’s also going to be a point where you need to actually bring in the private markets, because the numbers involved are so huge.”