Asset owners focus on climate adaptation as heat rises

As the US once again withdraws from the Paris Agreement and Trump threatens to end the “green new deal” – which he calls “the green new scam” – investors face the reality of a slowdown in progressive US climate policy after years of support under Biden.

The new Trump administration could add 4bn tons to US emissions by 2030, according to Carbon Brief and Rhodium Group.

Meanwhile, climate-change-related damages continue to shock communities and seize headlines, as demonstrated by the costly California wildfires, ever more active hurricane seasons, and apocalyptic floods in Valencia, Spain.

To date, the vast majority of institutional capital has gone to climate mitigation. However, as climate-change-related impacts increasingly disrupt economies, climate adaptation considerations will play a bigger role in portfolio risk management and investment decisions.

“Under a Trump administration, companies may see less transition risk as regulations are dismantled, but the physical risk may actually increase,” Peter Cashion of the California Public Employees’ Retirement System recently told the pension fund’s board. “Although this may be unfortunate, it does create investment opportunities in the area of resilience,” such as heat-resistant crops, power generators, air conditioning and fire suppression.

Launched in 2022, the Lightsmith Climate Resilience fund – one of the first private-equity growth capital funds focused on climate resilience – invests in water management, resilient food systems, agricultural and supply chain analytics, satellites and sensors, and catastrope modelling.

Yet such funds are still rather niche, partly because climate adaptation opportunities tend to be nascent, limited and not well suited to institutional investors, according to Gustave Loriot-Bosreup, founder of Compass Insights. Most adaptation finance still comes from the public sector, with institutional capital and commercial banks reportedly accounting for less than 3% of total financing.

Additional public support and market-based mechanisms are necessary to galvanise private capital towards large-scale infrastructure projects or nature-based solutions that improve resilience, he added.

“For institutional investors, climate adaptation is first and foremost a risk management challenge rather than an investment opportunity,” he argued. “Investors, as part of their stewardship practices, could benefit from pressuring their investee companies to build the adaptive capacity of their assets and reduce vulnerability towards climate related physical risk events.”

Despite this ever more pressing need to protect assets, climate adaptation has so far taken second place to climate mitigation in engagement conversations, as investors have pressured companies to reduce their emissions and set up net zero transition plans.

That dynamic could change as the world heats up.

“Asset owners are taking a stocktake at the moment,” he said. “There are major concerns that meeting the 2 degrees target has become incredibly challenging, especially bearing in mind that temperatures rose above 1.5 degrees for the first time in 2024.”

Climate risk analytics

Climate risk analytics – especially understanding the physical impact of climate change – is one area that has seen significant investment in recent years. Net Zero Investor recently reported that the insurance team and the investment team at the insurance giant Zurich are working together to develop their own in-house climate risk tool.

Venture capital fund SFJ Ventures identifies hazard analytics as one of three major adaptation investment themes in its map of the adaptation investment landscape (the other two are resource preservation and owned-asset protection).

Major re-insurance companies like ZurichRe have developed pricy climate risk tools to aid portfolio risk management, though question marks remain around the accuracy and reliability of such tools.

“Climate scientists have made a lot of progress on seasonal forecasting, but it can still be a challenge,” said Dr. Mark Roulston, a Lancaster University senior research fellow who has helped develop the climate risk tool CRUCIAL. For example, in 2024, various climate scientists predicted one of the worst years ever for hurricanes, but the season, although very active, wasn’t quite as bad as these initial forecasts.

“Given the sheer complexity and uncertainty of making climate forecasts, I am naturally suspicious of new companies that come forward touting machine-learning-driven crop yield forecasts, or other such risk analytics,” he added. “Such companies usually want to be paid upfront but offer no guarantees as to the accuracy of these models. The incentives structure is all wrong.”

Carbon Tracker has denounced slipshod climate economics and risk models provided by consultants and fund managers to their pension fund clients. Part of the problem, the thinktank claims, is a disconnect between climate scientists and financial advisors.

CRUCIAL’s answer to the incentives and the expertise problem is to use predictions markets to pool the expertise from various climate scientists working around the world into a single platform. The participating scientists make predictions on specific climate events, with CRUCIAL’s platform designed to turn their “bets” into probabilities of the different possible outcomes.

Participants in CRUCIAL’s markets are compensated based on the accuracy of the forecasts: the more accurate they are, the more they get paid.

The French reinsurance giant SCOR has provided funding to CRUCIAL to support its infrastructure and personnel and funds to incentivise participants in the prediction markets.

Philippe Trainar, director of the SCOR Foundation for Science, said: “The consequences of climate change are … the subject of lively controversy between experts. Prediction markets have demonstrated their unrivalled capacity to anticipate future trends in such controversial areas, where it is necessary to quickly combine scientific results, statistical observations and learning from experience.”

While it's still early days for CRUCIAL, Roulston hopes the tool can be used not only by public institutions but also pension funds, insurance companies, and other asset owners.