Adapting to climate change through equity investing

Adaptation efforts need to be ramped up

Greater adaptation planning and implementation is needed to address climate risks, according to the latest report from the UN’s Intergovernmental Panel on Climate Change (IPCC). Our high-conviction Climate Transition equity strategy is directly aligned with this expanding market for climate resilience solutions.

There has been widespread progress in terms of efforts to adjust to actual or expected future climate estimates, according to the report, generating multiple benefits. However, there remain large gaps between ongoing efforts, and the level of adaptation needed to cope with current levels of warming. The IPCC has discovered that adaptation efforts are currently fragmented, small in scale, incremental, sector-specific, designed to respond to current impacts or near-term risks, and focused more on planning rather than implementation.

Closing the gaps

The next decade in particular will prove critical to closing adaptation gaps, according to the IPCC, representing an important window of opportunity for investors. Societal choices and actions implemented over the next 10 years will determine the extent to which medium- and long-term pathways will deliver higher or lower climate-resilient development.

Soft limits to some human adaptation have been reached, but these can be overcome by addressing a range of primarily financial, governance, institutional and policy constraints.

The current situation presents an expanding market for adaptation solutions, underpinned by significant public-sector spending commitments. For example, the G20 countries have planned some USD 60 trillion to 70 trillion in infrastructure spending over the period to 2030. Furthermore, ongoing urbanisation means that around 60% of the environment that will host the world’s population by 2050 has yet to be constructed.

Hence, there is a growing need to increase investment in infrastructure. Investment on a sufficient scale is required to keep pace with global economic and population growth, as well as for existing infrastructure to transition to lower carbon intensity and greater resilience to climate damage. The scale of the opportunity here is an integral focus of the Climate Transition strategy.

Investment themes within the strategy

Source: LOIM

Finding the adaptation opportunities

Adaptation opportunities currently represent 25% of the portfolio. Verisk¹ is an example of a company with the capacity to help clients better understand and manage climate risk. Verisk’s customers have included the top 100 US property and causality (P&C) insurance providers, the top 30 credit-card issuers in North America, UK and Australia, and nine of the top 10 global energy providers. We believe Verisk’s expanding product line of climate and extreme weather-related products is undervalued and key to enabling companies to better understand and plan their risk exposures to more frequent extreme weather events.

Climate change risks and impacts can be reduced, within limits, if humans work with nature to adapt to changing conditions. However, successful adaptation requires urgent, more ambitious and accelerated action and, at the same time, rapid and deep cuts in greenhouse gas emissions. Adapting to climate change will require a major global transition in key sectors and require a massive increase in public investment. The situation presents numerous opportunities for new financial products to support governments and corporates to invest in adaptation.

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