Climate adaptation: the $2 trillion market the private sector cannot ignore

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Wonsik Jeong, Analyst, D3 Jubilee Partners, Curator, World Economic Forum Global Shapers Seoul Hub, Kimberly Chen, Founder, Resource, World Economic Forum Global Shapers Beijing Hub II, Lauren Shum, Curator, World Economic Forum Global Shapers Boston Hub

• Even if mitigation efforts do manage to stabilise the climate, humanity will have to live for a long time with some effects of climate change.
• Adaptation, therefore, is essential — and the private sector’s first movers on the market will enjoy a distinct advantage.
• The adaptation market could be worth $2 trillion per year by 2026, and the Global South stands to benefit from much of this.

Climate change is impacting virtually every industry and region of the world, but most of our climate funding has been for mitigation, not adaptation. This is a problem.

Even if mitigation stabilises the climate, we must still live with the effects of climate change. Many are already here: increased prevalence of wildfires and more destructive storms, for example.

Climate adaptation, therefore, is essential.

The cost of adaptation in developing countries is expected to reach $300 billion per year by 2030. By contrast, global adaptation finance flows were only $46 billion in 2020, of which only $28.6 billion went to developing countries. This is insufficient.

Developing countries are more seriously impacted by climate change. The world’s 55 most climate-vulnerable economies have already lost 20% of their GDP. There is a clear need for increased climate adaptation finance, especially in developing countries.

The private sector can help meet this investment gap. Currently, only 1.6% of all adaptation funding comes from private investment — making climate adaptation an untapped opportunity.

Why invest in climate adaptation?

Here are three reasons investing in climate adaptation in developing countries is a winning bet.

1. A growing market

The climate adaptation opportunity is enormous — and growing.

The market could be worth $2 trillion per year by 2026, and the need for adaptation solutions will grow as climate impacts become more prevalent.

Climate risks will impact virtually every industry: real estate assets will be damaged; agricultural productivity will decline; financial institutions will have to grapple with higher risk and even access to the internet could be in danger.

Damages from climate change-related events, such as wildfires, water shortages and greater intensity storms, are likely to total in the billions per event — this is why the adaptation market is valuable.

Currently, approximately two-thirds of global adaptation finance goes to developing countries. This means developing countries are the entry point to access the adaptation market. Further, the opportunity is only increasing. For example, delegates at COP26 in Glasgow urged for a doubling of adaptation funding to developing countries from 2019 levels to $40.6 billion by 2025.

Average funding per adaptation project in 2020 was $8.8 million, and the greatest funding for a single project was $1.1B. Private companies would do well to take advantage of this opportunity by launching or expanding climate adaptation ventures in developing countries.

2. Proven business models

Opportunities in the climate adaptation sector remain relatively unknown. For entrepreneurs and investors alike, this is an advantage.

Being an early market entrant may allow private businesses to gain traction without facing intense competition. Investing in climate adaptation companies can be a smart way for investors to balance risk in their portfolios, by serving as a hedge against exposure to climate events.

A major reason private funds have been hesitant thus far to invest in adaptation businesses is uncertainty that business models have been proven. But the number of succesful case studies is growing. Here are some examples:

SunFunder, a private debt management company based in Nairobi, Kenya, finances cleantech companies in Africa and Asia. SunFunder’s investments promote climate adaptation by delivering “improved food security, water efficiency, economic productivity” and agricultural resilience. It has invested $200 million in 58 companies and boasts a recent acquisition by Mirova, a Paris-based firm with $26.7 billion in assets under management, as well as a new $500 million fund.

E Green Global is a Seoul, Korea-based agricultural technology company producing the world’s first disease resistant potato seedlings (microtubers) on a commercial scale. The microtubers are higher yield and lower cost than conventional methods. The company promotes climate adaptation by improving crop resilience against changing climatic conditions and has secured $92 million in contracts so far.

Climate adaptation companies can include anything from flood defenses and cyclone early warning systems to FinTech and supply chain companies — all of which have a role to play in adaptation. FairbancandWagely, for example, are FinTech companies helping business owners and employees deal with climate-related shocks. Captain Fresh, an Indian seafood supply chain company with $126.5 million in funding, minimises spoilage of seafood shipments — critical now that climate change has reduced fishing stocks.

https://cdn.jwplayer.com/players/JHHCA5HS-ncRE1zO6.html

3. Public capital availability

Tens of billions of dollars of public capital are already flowing to climate adaptation projects in developing countries. Much of this is in the form of blended finance, which means private investors can leverage public dollars to augment their investments.

A privately managed fund, for example, receiving contributions from a public limited partner benefits from lower hurdle rates and longer fund life. Public funds could also give low interest loans to a private company, allowing them to pursue ventures in developing countries at lower risk. Blended finance creates opportunities for private investors and businesses to minimise risk while maximising upside and positive societal impact.

The Green Climate Fund (GCF), a fund established by the United Nations Framework Convention on Climate Change, is doing just this.

It has invested $3.9 billion across 45 private sector climate projects, attracting co-investment to the tune of $17.5 billion in total private assets under management. This means GCF was able to use public funds to mobilise over four times the amount of total capital. One way GCF and similar funds can enhance investor partner profitability is by taking a first loss position, improving the partner’s expected rate of return.

The GCF is just one of many funds and blended finance structures that lead to win-win scenarios for private actors and wider society.

Bet on climate adaptation

Now is the time for private businesses and investors to place their bets on climate adaptation, especially in developing countries.

The climate adaptation market is huge and growing, the business models are in place, the opportunities are diverse and the surge of public funding for adaptation sweetens the deal.

Investing in climate adaptation now means a chance at handsome financial returns while fighting climate change and helping the world’s most vulnerable.

The authors would like to acknowledge Ummamah Shah, Curator, World Economic Forum Global Shapers Karachi Hub, for her assistance in research.

Trending now: