Why climate adaptation is crucial for business and portfolio resilience
By Andy Howard, Global Head of Sustainable Investment at Schroders
London Climate Action Week (LCAW) – an annual jamboree of climate-related events, announcements, and gatherings – was surprisingly busy this year. Against a backdrop of political challenges, high-profile exits from industry initiatives and outflows from climate funds, we might have expected a more muted gathering. But as momentum gathered pace over the last couple of months, there were twice as many events during the week as there were hosted last year.
It’s a reminder that while climate investment has faced headwinds, and headlines have become more negative, the underlying picture remains more mixed.
In the US, where President Trump signed executive orders rolling back many federal climate policies, the US Climate Alliance brings together state governors representing over half the US population and economy, focused on “securing America’s net-zero future”.
Across the investment industry, on the one hand the last 12-18 months have seen high profile departures from climate groups, and the Net Zero Asset Manager initiative has suspended many of its activities while it completes a review and consultation over its future strategy. On the other, analysis of the 100 largest asset owners in the world (based on the Thinking Ahead Institute's latest list) shows over 60 have published decarbonisation plans and those strengthening plans over the last 18 months outnumber those weakening them (based on Schroders' analysis of public statements by those asset owners).
Our own commitment to proactively measuring and managing climate risks and opportunities in the portfolios we manage for our clients has not changed. Our commitment is to our clients, and we believe thoughtful climate analysis and proactive action is needed to deliver the outcomes they expect.
The consequences of more frequent and severe physical impacts of climate change are a growing focus for us and many of our clients. The lag between emissions being released and the maximum temperature response is around a decade on average (numerous academic studies examine this relationship including Zickfeld and Herrington), meaning the future has effectively already been written. Growing physical risks seem inevitable and climate adaptation will only become more important to securing the resilience of many businesses and portfolios. As the tangible damage of climate change’s impacts become increasingly stark – over the last five years, the economic costs of climate-related losses reached close to 50% higher than the previous decade – investor attention is increasingly focused on the risks and opportunities that shift presents.
Climate adaptation has received less policy focus than efforts to decarbonise, but there are signs attention is growing. With recent research showing that every $1 invested in adaptation can return over $10 in social benefits, there is a case for increasing support, and with separate research indicating that individual investments can generate average returns of up to 27%, there are opportunities in broadening climate investment to include its inevitable consequences.
Reflecting that, climate adaptation was a central theme during LCAW. Our own research and engagement build on work we have done in this area, including through novel investment strategies such as a fund focused on enhancing the affordability and accessibility of climate insurance.
