Heat records were broken all around the world in 2023, as huge wildfires destroyed homes and local economies in Greece, storms hit the Philippines and Mexico and, once again, droughts threatened agriculture in multiple geographies.
One way in which climate change manifests physically is via increased frequency and severity of extreme weather events. Storms, floods, wildfires, heatwaves and droughts are all becoming more common and more damaging. Extreme weather events bring considerable socio-economic costs to businesses, state finances and society as a whole.
Representatives of governments meet in December for the annual round of climate talks – ‘COP28’ – this time in Dubai. There is an increased focus this year on adaptation and addressing the impacts of global warming. This focus reflects the reality that climate impacts are not a future risk – they are here with us today.
Investing capital in climate solutions
Most investors will likely have developed views on how to invest around climate mitigation – looking for upside exposure to energy transition and decarbonisation trends, such as renewable energy, green chemicals, efficient buildings and electric mobility. With climate policy becoming increasingly widespread this century, supporting falling costs and maturing companies in such cleantech areas, investment strategies which cover such areas are now very sophisticated.
Investors, in both public and private markets, are now increasingly focussing on climate adaptation – the ‘other side’ of the climate crisis response and increasingly identified as an investable theme in itself. The payoffs have the potential to be considerable and the World Resources Institute claims that every $1 invested in adaptation generates a return of 2-5x.
From opex to capex
If your home or factory floods once every 50 years, you mop up, replace damaged items, and carry on. However, if you are hit by extreme weather at a higher frequency – every five years perhaps – then the approach may be different, and plans may turn to flood protection investments. Frequency is key to response. The same logic of building resilience, rather than just repairing damage, applies to government expenditure, infrastructure and healthcare planning.
This change in response to extreme weather, effectively a switch from opex to capex, is at the heart of the climate investment strategies of a growing number of investors, including Triton.
The need to build greater resilience to extreme weather events will catalyse demand for products and services across multiple economic sectors. We believe uptake in demand will increase in a huge range of areas – from water management equipment, to modified food types, engineering services to increase resilience for towns and communities, medical provision for response to heatwaves and wildfire-combatting solutions.
Focus on water
Water is critical to life on earth. Society needs water for domestic use, energy, manufacturing, the global food system, and perhaps no ecosystem could survive without consistent patterns of water availability. Yet climate change affects the entire water system – alongside pollution, population growth and the demand driven by increasing affluence, we are placing ever-greater pressure on water resources.
The Intergovernmental Panel on Climate Change (IPCC) has repeatedly highlighted the challenges posed by climate change to water resources. The IPCC’s more recent Assessment Reports and its Special Report on Climate Change and Land found that climate change is likely to exacerbate water scarcity in many regions of the world. Climate change is altering precipitation patterns, driving decreased natural storage of water in snow and ice, and increasing variability in the flow of rivers, ultimately causing both flooding and drought.
Water quality is also impacted through changes in temperature, precipitation and drought, increasing risks to human health. Overall, we believe water will be a climate focus for investors and companies across many sectors.
Climate adaptation for a private equity portfolio
At Triton, we engage with our portfolio companies on their climate response, looking for climate risk assessments as well as business continuity and crisis management plans. Increasingly, European and UK sustainable finance regulation will require such response planning.
The negotiations in Dubai are likely to focus on the needs of societies both to respond to such events when they happen and to build resilience against their future occurrence. This will require substantial investment, in a range of products and solutions with strong tailwinds. The UN has estimated that spending on climate adaptation will double by 2030.
Whatever is agreed at COP28, we believe adaptation investments will increase as the impacts of warming intensify during the 2020s and 2030s, bringing risks and opportunities alike to private market investors.
The author is Ashim Paun, head of sustainable investing at European investment firm Triton.