Why Is Nobody Investing in Climate Adaptation?

Contrary to the rest of the U.S. tech industry, the market for climate mitigation solutions has boomed of late. Since 2022, U.S. solar energy capacity has grown 51%; sales of electric vehicles rose 146%; and investors have plowed $473 billion into 152 manufacturing clean energy manufacturing projects. The U.S. Energy Information Administration projects battery storage capacity will double in 2024. In 2022 alone, private investors threw more than $70 billion at startups working to decarbonize everything from cement production to aviation fuel. And this is all as the cost of solar has dropped 82% over the past decade. Globally, the world now invests almost twice as much in clean energy as it does in oil and gas.

The period has not been quite so fecund for adaptation solutions, however. Whereas mitigation technologies focus on cutting emissions, adaptation and resilience focuses on solutions that can reduce the risks and impacts of climate change. Although Bank of America analysts predicted four years ago that adaptation and resilience could become a $2 trillion market by 2026, annual investment grew just 28% in 2022 to $63 billion. In that same time, financing for mitigation technologies reached $1.2 trillion.

The main distinguishing factor between the two approaches to climate tech: Where the money is coming from. While global mitigation spending is generally shared evenly between the public and private sector, 98% of adaptation finance comes from the public sector. Without the profit motive to drive down costs, many solutions don’t make financial sense for investors. “Our targeting is better but the cost curve has not been substantially cut,” said Ali Zaidi, the president’s chief climate advisor, at the Innovations in Climate Resilience conference in April. We’ve made progress, he said, but “we haven’t cut it by a factor of four or a factor of eight — that’s the kind of progress we’ve made on mitigation technology, but not in the arena of resilience.”

Sonam Velani, co-founder of Streetlife Ventures and an early investor in adaptation solutions, told me that, “traditionally, adaptation has been seen as a government problem. But today, more and more businesses are actually coming to solve those solutions.” The new climate disclosure rules from the U.S. Securities and Exchange Commission put further pressure on companies to understand their products’ climate impact. “If you look at a lot of the climate-related disclosures that are now being required,” Velani said, “companies are actually required to understand climate risk and what impact that has on their bottom line,” and making that information public drives accountability.

In early April, a coalition consisting of the Bezos Earth Fund, the philanthropic ClimateWorks Foundation, impact-focused private equity firm the Lightsmith Group, and MSCI Sustainability Institute issued a new report called “The Unavoidable Opportunity,” aiming to understand the private sector adaptation opportunity. Jay Koh, Managing Director of the Lightsmith Group, said the title was inspired by the United Nations Intergovernmental Panel on Climate Change’s own language on adaptation. “Climate resilience investments can be made at scale,” the report determined, “including in publicly traded companies.”

MSCI said its model “builds on existing definitions and approaches to identifying adaptation companies,” including the EU’s taxonomy of sustainable economic activities, then used a large language model to scour companies’ annual reports for products and services that qualified. MSCI considered the companies adaptation and resilience investments only if they were in the business of adaptation, as opposed to simply “taking measures to make their operations more internally resilient.” By that metric, 827 companies, or more than 11% of publicly traded entities in developed markets, could be considered adaptation solutions.

All these new green opportunities didn’t sprout from thin air. The idea is to push back the “investment frontier” for adaptation — to broaden the classification beyond solely “pure play” companies focused explicitly and exclusively on climate adaptations to include those with multi-use products — and thereby bring in more capital. The same is true in the mitigation market, where examples are more plentiful. Take Siemens, for instance. The German conglomerate that sells everything from healthcare IT to dishwashers; it also happens to be a leader in offshore wind energy. Despite no mention of climate mitigation in Siemens’ mission or sustainability tagline on their homepage, they are still a key player in climate mitigation technologies.

Katie MacDonald is a co-founder of Tailwind, a research and investment firm focused on accelerating the deployment of climate adaptation and resilience solutions. She told me that “most companies don’t call what they do adaptation or resilience.” In fact, she said, “most of the companies and solutions we’ve spoken to so far don’t call themselves climate change anything — they call themselves risk management or agriculture analytics or supply chain or healthcare diagnostics.”

The MSCI report sets out a list of qualifiers to help investors better understand what adaptation is, but — crucially — stops short of saying what adaptation isn’t. Koh explains the thinking. “We think it’s very early in the development of adaptation to consider” excluding any business in particular. “If we would had said early on that decarbonization only means solar panels, then we would have never opened up our minds enough to decarbonize agriculture, transportation, and buildings.”

While climate impacts will be felt across all areas of the economy, tagging such a wide range of companies as climate adaptation solutions could leave the space vulnerable to greenwashing. The report uses pipes as an example. Pipes are critical for resilience tasks such as stormwater drainage and irrigation. But the same companies also sell pipes oil fields.

There are existing standards that can help answer these questions. The UN’s 17 Sustainable Development Goals, for example, codified in 2015 at the landmark UN Sustainable Development Summit, provided a framework for organizations to measure their contributions across climate impact areas. There are also more complex metrics such as adaptive capacity, which measures, for instance, how much excess heat a crop can withstand before its yields begin to decline.

MacDonald told me she can envision other outcome-based metrics, as well. “Whether it’s looking at reduced negative health outcomes and mortality or increased asset health and functionality, there are a myriad of ways we can measure the presence of a climate resilience benefit,” she said.

The MSCI team hopes the report’s findings can enable investors and portfolio managers to create an investing strategy that encompasses every size of company including seed, venture, growth, and listed equities. Koh emphasizes that investing in adaptation isn’t a matter of wondering what the business models will be or waiting for new startups to appear. The report shows that there’s already an identifiable set of public companies that could make up an investment strategy for your existing 401k, pension plan, or portfolio.

The point is not merely to recharacterize more investing as adaptation-related, inflating the statistics with no real change in fortune for businesses and governments attempting to fortify themselves against the climate of the future. The point is for private capital to drive demand for solutions that not only prevent immense losses but foster a higher quality of life for billions of people.

“You actually know more right now about how climate change will unfold between now and 2040 than you do about the rate of inflation, interest rates, AI, consumer behavior or the betting odds on who Taylor Swift will be dating next,” Koh told me as he walked through the report’s findings. “We think that leads to an unavoidable opportunity,” though he added a caveat: “I believe these statistics were made before Travis Kelce.”