Whether it is wildfires, rising sea levels or catastrophic storms, climate change is leading us into a new and terrifying territory. People, communities, ecosystems, and economies are already battling with the continuous onslaught of climate change, which is putting immense pressure on all fronts. In response, increasing investments in renewable energy, sustainable infrastructure and climate resilience are looked at in order to limit the damaging effects and defend the future of our planet.

There is now, more than ever, a serious demand for climate resilient investments which have the potential to greatly influence the course of business and industries globally. However, there is still a need for awareness and attention to ensure that these investments are being appropriately prioritised and implemented across all kinds of industries.

In a world where a lot of the time incentives are vital to action, building frameworks that support sustainable practices and investments on a larger scale relies heavily on the engagement of governments and policymakers. Opting for easy investments may supply quick profits in the short term but taking on climate resilience is an investment for the sustainable abundance of our planet and its inhabitants, in terms of environmental health and financial stability. At present, only two percent of private climate finance is going into resilience. Which, ultimately, is not enough to deal with the threats of climate change, where greater resources and attention are needed. To really face the climate crisis, we have got to look at the bigger picture, beyond just acknowledging existing threats like carbon emissions. This involves examining every angle of these risks, while enforcing strategies which will lessen the threats brought about by extreme weather and physical hazards.

The world needs policies that work, and not only work but encourage businesses to invest in ways to withstand climate challenges, which means having a true understanding of what those challenges are.

Neutralising the threat
It is difficult to ignore the massive risk carried by climate change in today’s financial world. It is not just an environmental issue anymore; rather a threat to the stability of our entire financial system. Imagine if something happened to disturb large agricultural regions that cause food shortages and price spikes, and how this would impact a variety of industries affecting supply chains, consumer spending and thus the global economy.

Investing in resilient operations is critical for ensuring assets and investments are fit for purpose

According to the intergovernmental panel on climate change “the magnitude and rate of climate change and associated risks depend strongly on near-term mitigation and adaptation actions, and projected adverse impacts and related losses and damages escalate with every increment of global warming.” Supporting this observation, an alarming report, backed by 243 scientists from over 60 countries, warned that even with substantial reductions in greenhouse gas emissions, we are on course to witness a temporary 1.5°C increase in temperature within the next two decades. It is these figures that make you realise how easy it is for our world to continue on its current course without any adaptation or strong mitigation initiatives and eventually crumble. Climate-smart economies offer us a chance to avoid a bleak future by being prepared for any situation, while knowing how to deal with the consequences.

Reports from the 2023 Edelman Trust Barometer survey confirmed that 93 percent of respondents from 14 countries agree that “climate change poses a serious and imminent threat to the planet.” So, although it is obvious there is an awareness of the need for climate resilience, the current state of climate-resilient investments shows a contrasting picture. While a number of regions have seen considerable progress in renewable energy infrastructure and sustainable agriculture, there are still many challenges remaining for research, development and support. Financial incentives are weak, access to climate data and risk assessment tools is limited, there are uncertainties over regulations, and we lack benchmarks for evaluating and comparing climate resilience across different investment opportunities.

These concerns persist due to a combination of factors. Often, the reason for poor financial incentives is because governments and organisations prioritise other sectors or lack the necessary funding. A lot of the time climate data and risk assessment tools have limited access because of the little investment in research and development of data collection infrastructure. Regulations are unclear as a result of complex policies and the differing agendas of various stakeholders, while the lack of benchmarks is often because frameworks are either not widely acknowledged or there is difficulty in maintaining consistent resilience indicators. Neglected issues like these make it problematic for investors when assessing the potential risks and returns of climate-related projects, making for an even less likely investment.

However, among challenges lies opportunity. According to a report by the Boston Consulting Group (BCG) and Global Resilience Partnership (GRP) it was said that for every dollar a company invests in resilient operations and adaptation it can result in financial benefits ranging from twice to 15 times the initial investment. All things considered, taking climate resilience into account with investment decisions means investors would contribute to the sustainability of our environment where it is highly valued while also having a chance to improve their financial performance in the long run. World Finance spoke with the Chief Investment Officer of the Pollination Group, Diana Callebaut, about the current state of climate resilience and the role of finance in combating these atmospheric threats.

“Investing in resilient operations is critical for ensuring assets and investments are fit for purpose for the impact of climate change. There is no drawback for long-term investors and only benefits, ensuring assets are able to continue operations,” Callebaut explains.

In recent years, more corporates, financial institutions, and institutional investors are starting to look more closely at the physical and transitional risks associated with climate change. They are publishing climate transition plans with a goal of reaching net-zero emissions while factoring the transition risks into how they decide where to invest their money.

Callebaut continues; “The prevalence of dedicated climate resilience private funds is relatively limited; however there is a significant amount of investment on an asset look through basis in thematic and/or diversified private market funds. For example, owners of infrastructure assets such as airports and ports are aligned with ensuring the longevity of their assets adapting to the impact of climate change. Nice airport has parallel runways, partially built in the sea, making them vulnerable to rising sea levels and rough seas during storms. The operator proactively completed maintenance capital expenditure on existing embankments and sea dikes to strengthen and protect the airstrips on the maritime side of the airport.”

Suggested by Callebaut, there have been proactive measures taken by asset owners to adapt to the impact of climate change and protect their assets from risks such as rising sea levels and storms. However, even with this progress, there are still issues preventing us from investing more money in transitioning to low-carbon economies effectively. Co-ordinating global carbon pricing remains a challenge, and while initiatives like the Task Force on Climate-related Financial Disclosure (TCFD) is making headway in improving disclosure standards, these hurdles with data gaps, analytical tools and inconsistent metrics still exist.

Going forward, the financial system appears to need a thorough reset in order for it to incorporate climate risks and opportunities into central banking, regulation and market practices. Financial markets have the ability to help fuel the transition to a low-carbon, sustainable future by aligning market practices with climate goals.

Clean energy and climate technology are only receiving a tiny fraction of early-stage investments

In fact, we have already witnessed a number of initiatives which have been effective in incorporating climate risks into their strategy. These include creating green bonds, which finance eco-friendly projects, evaluating the resilience of financial institutions’ portfolios against climate-related risks through stress tests, and considering environmental, social, and governance (ESG) factors when making investment decisions.

A wise investment in resilience now is expected to pay dividends for later years by allowing investors to protect the environment and reap significant financial rewards, especially in light of the growing financial costs associated with climate change and natural disasters.

The climate financial outlook
In the words of the Pollination Group, “Climate investments seek to slow the pace of climate change whereas climate resilient investments focus on adaptation and mitigation of the impact of climate change.” It is for this reason that both are so important to take into account when it comes to protecting our planet and preventing any further irreversible damage.

The Global Landscape of Climate Finance Report from 2023 provided information on how proceeds from green bonds are used in a variety of industries, including waste management, buildings, infrastructure, forestry, and other land use. Following a 28 percent growth, reaching $173bn between 2021 and 2022, the question remains, where do these proceeds really end up? Looking at how funds are used to address severe environmental issues more closely, let’s consider how these resources have been distributed among these sectors and what areas warrant more attention.

Funding disparities in agriculture: Despite their potential to reduce emissions, agriculture still receives disproportionately low funding, comprising less than four percent of total mitigation finance.

Allocation of mitigation finance: In recent years, mitigation finance has made great progress, amounting to a total of $1.15trn between 2021 and 2022. According to the report, transportation projects seem to benefit the most from investments, receiving 29 percent, while energy projects account for 44 percent of the total.

Challenges with adaptation finance: Despite reaching a record high of $63bn, resources for adaptation are still far short of what is expected to be needed. The majority of the funding for adaptation initiatives comes from governmental sources, with minimal contributions from the private commercial sector.
Deficiency of AFOLU sector financing: The AFOLU sector, which is very vulnerable to the effects of climate change and has a desperate need for adaptation measures, has a financing deficit, with an aggregate total of just $7bn.

After examining how these funds are allocated, it becomes clear that there needs to be a more equal distribution of resources and a concerted effort to give priority to sectors with the biggest potential for impact, to appropriately address environmental concerns.

Private and public financing
According to Evergreen Climate Innovations, when it comes to receiving capital from private and public sources, there is a seemingly big gap in how it is distributed. Despite the organisation’s efforts to support impactful technologies and businesses, clean energy and climate technology are only receiving a tiny fraction of early-stage investments, a contrast to the $40bn invested in climate technologies through private funding back in 2021. It is hard to know for sure why this growth hasn’t continued a steady increase, but it might be that investor priorities have shifted, or the returns may not have been consistent enough and the easy option is favoured.

Although the amount of public investment allocated to climate change varies enormously depending on government priorities, policies and budgets respective of their region, many countries have been providing more funding to climate-related matters with some allocating large amounts of their budgets to initiatives such as renewable energy development, climate adaptation projects and research on climate change mitigation strategies. As of right now, the largest channels of international public finance supporting climate resilience and mitigation, particularly in developing countries, include the Green Climate Fund (GCF), the Global Environment Facility (GEF) and the World Bank-administered Clean Technology Fund (CTF).

While public investments for climate change are making a difference, advocates push for greater private investor involvement. Deloitte’s Centre for Financial Services FSI Predictions 2023 Report estimated a $2trn private funding shortfall for next-generation climate technologies to reach the target of capping global temperatures at 1.5°C above pre-industrial levels by 2030 (see Fig 1).

In a conversation with World Finance, Climate Safe Lending Network shared its views on what collaborative efforts are needed to effectively address climate challenges.

“During our Banking on Climate Justice initiative – which helped in part outline the rationale for why integrating a climate justice lens into climate transition planning is a non-negotiable component for any climate action given the systemic nature of the challenge – we noticed that cross-sector partnerships were the most effective mechanisms for addressing climate justice and therefore the climate crisis.

Building relationships between traditional and non-traditional financial institutions, as well as with the public sector, can help create new avenues for financial flows, and enable money to get where it is needed, when it is needed, for the true length of time it is needed – collaborating to overcome barriers such as loan term lengths, investment size, interest rates, etc.”

Climate finance hotspots
Geographically, developed economies continue to account for the majority of climate finance mobilisation, with the US, Canada, Western Europe, East Asia and the Pacific leading the way. China in particular has demonstrated exceptional efforts in mobilising domestic climate funding, outperforming the combined efforts of all other nations.

In terms of government involvement in market sector investment, initiatives are underway to collaborate with industries and communities to broaden viable possibilities. In fiscal year 2022, FEMA in the US pledged around $3bn for 748 resilience projects across states and territories, corresponding with international standards. Similarly, the UK government set aside £5.2bn for flood and coastal projects, as well as £750m for the Nature for Climate Fund, which intends to better resilience to climate change. Meanwhile, in Australia, the federal government is driving investment partnerships with large companies such as IAG and National Australia Bank.

While private finance accounts for nearly half of total climate finance, the volume and speed of private investment falls short of what is required. Developed economies have shown greater success in mobilising private finance compared to emerging markets and developing economies. Essentially, there is a real need to narrow the distance between existing funding and the growing demand for climate finance, particularly in developing and low-income economies, to address the challenges of climate changes successfully.

Climate resilience efforts for disclosure
As investors, stakeholders, businesses, and regulators recognise the financial implications climate change could cause, they are pushing harder for transparency in how institutions handle climate risks. Undoubtedly, climate change threatens to drain billions from global economies in the forthcoming decades, primarily through wreckage inflicted by extreme weather events. With that, it is becoming clear that the economic toll of physical climate risks will far outweigh adaptation risks irrespective of scenario or timeframe.

Together, we must make sure our communities are equipped to handle whatever nature throws our way, pressing us to look beyond the world’s carbon fixation. Despite its importance, focusing solely on carbon reduction may overshadow other aspects, such as investing in strong, safe infrastructures to cope with such extreme weather events.

Just as no two snowflakes are alike, climate change affects different regions and communities in completely different ways, which means there is no one solution.
Solutions need to be developed and customised to the needs of each community to adequately address the challenges they face. Building resilience starts at a local level, which means it requires a collective effort from all areas to develop and invest in robust infrastructures that protect lives and businesses.
“For us, one of the more tangible realities of where we believe greater attention and resources need to be directed are on local climate resilience efforts and the reality of how climate justice needs to be seen as a necessary integration into core strategic designs for societal and financial stability.

Practically, this means investments that support people currently most impacted by climate effects, prevent future societal and environmental damage, and shift towards locally centred, climate resilient economies,” shared the Climate Safe Lending Network, on the need to increase attention and resources for local efforts.

One of the biggest problems standing in the way of action on climate change is that uncertainty surrounds the issue. We are uncertain about data collection, the nature of the Earth’s climate system, predicting scenarios and decision-making when it comes to the socio-economic and political aspects. However, it is not just about the uncertainties themselves, as it is human nature to fight against uncertainty. The real challenge is about communicating these uncertainties and recognising the tools we have at our disposal or tools we may need to produce to limit the effects of climate change.

Proactive policies and incentivising strategies are essential in overcoming these uncertainties by providing us with a clear direction and motivation for collective action towards a more sustainable future. Governments can implement measures that encourage investment in resilient infrastructures and promote sustainable technologies. For instance, offering tax breaks or financial incentives for climate resilient projects can spur private sector involvement. Additionally, public-private partnerships can streamline financing and implementation processes for resilient infrastructure.

According to the Climate Safe Lending Network, policies are necessary because of the current inadequacies in the structures of financial institutions, which fail to incentivise climate-resilient measures. Through their network they have actively collaborated on a range of policy recommendations aimed at expediting climate resilience through initiatives like Banking on Climate Justice and an open letter to the Basel Committee on Banking Supervision. Most of these recommendations revolve around ensuring that policy is used not only to accommodate but also encourage new investments in climate resilience at a local level. The multi-stakeholder organisation emphasised the necessity of ensuring that all existing financial activities and investments do not exacerbate environmental deterioration and climate risk without transparency.

“Despite the reality of the need for policy, it is important to recognise this should never be used as an excuse for inaction within financial institutions, particularly given the undeniable realities of climate risks institutions face to their own financial stability and that of the clients they serve. Furthermore, given the political influence of many financial institutions, they have a responsibility to leverage their influence in supporting, rather than opposing laws and regulations that foster climate resilience,” commented the Climate Safe Lending Network.

The technology outlook and solutions
With technology taking the fast lane, there is a big demand for its role in managing climate change. While some technologies aim to cut emissions and prevent the climate crisis from worsening by using renewable energy sources like solar power, hydropower and wind energy, others are geared towards pre-emptively protecting against potential climate change impacts. These solutions include the development of early warning systems, sea walls and the cultivation of drought-resistant crops.

According to the IPCC’s Climate Change 2022 report, digital technologies hold promise in supporting the fight against climate change and meeting sustainable development goals. With this, the report explains how climate technologies like sensors, robotics and artificial intelligence have the potential to reduce the consequences of climate change by improving energy management, increasing energy efficiency, and promoting the use of clean energy sources, creating more economic opportunities.

When we look at technological developments within fields like water resource management, agriculture, and urban planning it is clear that solutions like rainwater harvesting, green infrastructure, sustainable transportation systems and efficient irrigation systems are instrumental to economic growth, social equity and environmental preservation.

Developed economies have shown greater success in mobilising private finance

There was fear that development for climate technology investments might come to an end when the world hit a storm with Russia’s invasion of Ukraine, the accompanying energy crisis in Europe, global economic turbulence, and market decline. Yet investments in climate technologies were growing in spite of the difficulties. Global investments in clean energy technologies are said to have hit a record level, with a substantial amount of funds going toward energy storage technologies, renewable energy projects, and the construction of sustainable infrastructure.

However, while technology appears to play a vital role in improving the impacts of climate change, that’s not to say it doesn’t bring its own challenges. For instance, the use of digital technologies and devices contributes to more e-waste, which can in turn lead to further environmental hazards; automation of certain tasks by technology causes job losses in traditional sectors, adding fuel to the fire for socioeconomic disparities. Another pressing concern is the widening of the digital divide, further marginalising communities with limited access to technologies. With this in mind, the use of technology to address current climate issues must be properly governed to prevent exacerbating them.

As the climate crisis is a multifaceted challenge, our response must be too when formulating a plan of action. The Paris Agreement, aimed at limiting global warming to well below two degrees, is proof that we are serious about confronting climate change. But now it is time we moved from rhetoric to action, as our actions today will determine the future we leave behind for generations to come.

From disparities in climate finance to the need for progressive technologies and resilient infrastructures, the solution lies solely in the collective efforts of individuals. If governments create policies and incentives for sustainable investments, businesses reduce their carbon footprint and invest in renewable technologies, investors choose green investments and communities engage in climate education and awareness, together these small actions will account for a substantial reward. One is a healthier planet and another, a greater long-term financial stability with less risk of major financial losses. Once financial endeavours are entirely aligned with climate objectives, we will witness a whole new dynamic between our economies and the environment.

Like how dropping a pebble in a pond creates a ripple effect, over the course of life, every variable and action influences the outcome, which makes it all the more important to be mindful of our choices and the impact they have on our planet. The sooner we realise everyone plays an equally important role in mitigating the effects of climate change, the sooner we can combine efforts to write our future as we envision it.