The climate adaptation challenge

Asset risk versus systemic risk

To what extent is physical climate risk an asset level problem and to what extent is it something more systemic?

David Carlin: The reality is that the climate situation is only going to worsen. Even with a real policy shoulder to the wheel on adaptation, we are still going to see problems proliferate and costs rise, much in the same way that despite a moral reckoning there are still millions dying from smoking. The climate challenge is even more complex and we could get to the point where it is utterly destabilising.

Part of the problem is that when you evaluate the perimeter of each individual entity, you end up with something rather underwhelming. What we learned from the GFC, however, is that financial markets are correlated. We need to start adding up some of those correlation factors.

At the moment, we are doing surgery through a microscope, looking only at the cells and not at the patient as a whole. Sectors don’t fall because everything fails. It only takes one thing to break and everything else will collapse around it.

Carlota Garcia-Manas: I agree that adaptation is still primarily being driven by individual interests. The concern is that when individual exposures are addressed, systemic exposures still remain. We saw that with the fires in LA in early 2025. Individual houses that were resilient by design were left standing, while the whole surrounding area burnt. Any value retained in those houses will be marginal. They will be nearly impossible to resell without structural and systemic resilience built-in.

Maria Nazarova-Doyle: We have talked about an asset approach versus a systemic approach, but there is an aspect in between that is worth considering, and that is an expanded asset approach. We are investors in NSW Ports in Australia. We invested heavily in making the port resilient, and so when extreme flooding occurred in 2022, the port was fine.

The problem, however, was flooding in the road infrastructure around it, which meant customers could not get goods in and out, and so the port was not operational in any case. We agreed a short-term solution with the City of Sydney, which allowed us to use the rail network. But then a landslide brought that railroad to a halt as well.

Those events really encouraged us to think more widely about physical climate risk and we have since been advocating for stronger rail networks to support the country. There is a transition happening from a pure asset-based focus to broader policy work and I think that will eventually result in a truly systemic approach.

Manuel Vicente: I could not agree more. Looking at specific, granular assts owned or operated by a client is a critical step in physical risk assessment and adaptation solutions, but it is as important, if not more important, to be able to assess the disruption to the infrastructure and connections to that asset.

That is why it is critical to assess disruption to road, rail and power grids, for example, and to engage with local authorities to jointly build contingency plans to ensure continuity of services. Business disruption is a key pillar that needs careful assessment and insights in order to drive meaningful actions.

Climate data and analysis tools

Do the requisite data and tools now exist for investors to assess physical climate risk?

Manuel Vicente: We are seeing our clients embed climate data in their behaviours and approaches. In the real estate sector, it is being embedded in sizeable shifts in valuation projections. In the banking sector, it is being embedded in client engagement and counterparty credit profiles, with companies that face higher physical climate risks resulting in enhanced engagement and loan re-assessment or provisions. In insurance, the data is being embedded in what are known as technical premiums. Private equity firms, meanwhile, are reassessing their investments under the physical lens.

Given this traction, I am less concerned about the financial services sector than I am about the corporates themselves. It is the corporates that lack both the access to information and the capital to build resilience. That is where we need to see more policy and industry co-ordination come in.

Otherwise, we could see systemic risks driven by asymmetric information. In other words, we could observe those with access to the forward-looking data reprice and potentially move out of markets, leaving stranded assets behind. We need to empower the corporates who operate the assets to drive their growth and that is where adaptation and resilience finance comes in.

Chris Dodwell: There are still shortfalls in the data that is available to investors, as well. The physical locations of assets are generally still not widely available. The same is true of information pertaining to vulnerabilities in supply chains. Companies may have that data but they are not disclosing it. The third area where we need more insight is on what steps companies are taking to manage their risks. What are they doing to build their own resilience?

We recently did a deep dive into the physical climate risks faced by semiconductor companies and data centres, in 88 asset locations, together with Oxford University. We found that data centres are being hit by heatwaves while semiconductors are being hit by flooding.

Not all companies within those industries are being equally affected, however, which means that investors really need to understand where assets are located and what mitigation activity is taking place. That information simply isn’t readily available at the moment.

Samriddhi Sharma: The quality of spatial data and what you can do with it is far greater at an asset level than it is at a portfolio level. Assessing concentration risk across diverse portfolios requires comprehensive climate data – which remains a challenge. It also showcases why we need multiple stakeholders – climate scientists, local authorities, policymakers and asset managers – to work together. There is an urgent need for co-ordinated international policies to ensure transparent, reliable climate risk data for all assets.

Maria Nazarova-Doyle: The situation is different as a private investor. We know our assets well. We have people on the board and we have access to all the data that we need. However, we supplement that with climate tools and external data sources to an extent to double check what we already know and to identify any potential blind spots. My perception is that those tools are improving, even if methodologies remain imperfect. They can also be useful to compare assets across the portfolio. They may not provide an absolute truth, but relative truth can be helpful as well.

Encouraging adaptation capital

What can be done to encourage more capital into adaptation strategies?

David Carlin: It is all very well talking about how much capital is needed to fund climate adaptation, but we also need to talk about the economics. Just because investment is needed, doesn’t automatically translate into returns, and that is something markets are struggling with.

Samriddhi Sharma: Protectionism and defence are major themes today, but while many institutions have exclusions relating to investing in weapons, for example, climate adaptation and resilience can be an interesting way to tap into that protectionism and defence macro trend. Just think about access to water or damage to energy grids due to severe weather. It is all interconnected.

Maria Nazarova-Doyle: We invest in real assets such as airports, ports and toll roads. These are assets that are susceptible to floods and bush fires and so we think about return on investment in terms of protecting the cashflow generation capacity of those assets. If an airport floods, it can no longer function. Viewed in that light, investment in adaptation is an economic imperative.

David Carlin: What we really need in order to start seeing capital flow freely into these products is for them to be boring rather than exciting. At one point, fixed mortgages were considered vanguard. So were securitisations and LBOs. It is only when these things become commonplace and relatively uniform that appetite really starts to grow and that is where we want to be with adaptation. Regulation can play a role in getting us to that position and that is what will bring the capital in.

We are also seeing work being done in terms of the creation of taxonomies, laying out the adaptation investment opportunities that exist around energy sector resilience, for example, or else water sector resilience or healthcare adaptation to deal with all these diseases that are going to become more prevalent.

I am certainly not advocating for regulated taxonomies, but sharing information about where these solutions exist can be helpful in driving investor demand. If people understand where the opportunities lie and how returns can be made, that will inevitably increase investor interest.

In addition to establishing taxonomies, where else are you seeing industry collaboration taking place?

Chris Dodwell: There are certainly attempts at industry collaboration. The Climate Financial Risk Forum (CFRF) is a great way of getting asset managers, banks and insurers to come together to create common scenarios, for instance. The approach that has been decided on is called ABC: ‘Aim’ for a 1.5 degree scenario. ‘Build’ for 2 degrees and then have ‘Contingency’ beyond that. If we can get everyone using consistent scenarios, that is a good starting point.

Manuel Vicente: David mentioned taxonomies. They have an important role to play in forging a more structured approach with common definitions and we have already seen an encouraging number of frameworks emerge. Standard Chartered and UNEP FI released a framework in April 2024, delineating 110 adaptation and resilience activities. At the back end of 2024, we also saw the Climate Bonds Initiative publish a resilience taxonomy during Climate NY week and the CFRF published a helpful adaptation guide in October 2024. Ultimately, this is something that should be led by business as it makes business sense.

Government policy and regulation

What role should policy and regulation play in creating an enabling environment for adaptation investment and what can investors do to promote that outcome?

Khadija Ali: Some form of resiliency standards are critical in the context of the broader economic growth narrative. This will be of importance as we think about the future design and build of infrastructure, and we have an opportunity to incorporate this type of thinking in advance. If we are not thinking about resiliency now, we are putting ourselves at risk and we don’t have a lot of time. These things need to be baked in immediately.

Carlota Garcia-Manas: Regulators are signalling interest in finding out what investors are doing about physical climate risk and how they are modelling scenarios, but they are providing very little guidance on what is acceptable. While overly prescriptive rules risk stifling innovation and proving counterproductive, clearer guidelines – or at least guardrails – on the purpose of such disclosures and how regulators intend to use the information could provide much-needed clarity.

Can the private sector really influence government policy?

Chris Dodwell: I think governments are more ready to listen now than they have ever been because they understand how important private capital is going to be in addressing this challenge. The Institutional Investors Group on Climate Change recently attended a round table with Teresa Ribera, the European Commission’s executive vice-president for a clean, just and competitive transition. That conversation was focused on reducing emissions but there is also an opportunity within these dialogues for investors to debate the ask around physical risk and adaptation, and to share views on the appropriate roles for public and private actors in this space.

Investors need to explain that they have this capital ready to be deployed but that they need government and regulators to lay down the train tracks and to share priorities sector by sector.

David Carlin: I would agree that one of the reasons that things are not moving faster is that the messaging is not clear and not all financial institutions are as far along on this journey as those of us around this table. There are leaders forging a path, but we really need to see the whole industry voicing their opinions in chorus, the way that we see with corporate taxation, for example. Then the message would start to be amplified and the effectiveness of policy intervention would grow.

Proactive responses to climate risk

Are there positive examples you can share regarding corporates or public organisations proactively responding to physical climate risk?

Khadija Ali: At Lloyds Banking Group, we are seeking creative ways to leverage nature to solve for the twin crisis of nature and climate. We have several pilot projects that look to leverage nature as a means to support resiliency and have issued a report on the importance of investment in nature-based solutions.

Manuel Vicente: NHS England came out in May 2025 with a mandatory climate adaptation framework, which is to be integrated in its net-zero green plans. This is an important development, because it is leveraging the existing transition plans to integrate physical risk adaptation plans, rather than reinventing the wheel.

It should be seen as an important second pillar in the existing net-zero transition plans, focused on building resilient healthcare infrastructure and services. Effectively, the message is “Let’s get on with it,” which is a powerful statement of intent.

Chris Dodwell: I just have one reservation about that. This shouldn’t be used as an excuse to slow down net-zero transition plans or vice versa. I agree that there is an argument for discussing the two issues together, but sometimes it is necessary to isolate a problem in order to draw attention to it.

In the longer term, you can argue that environmental risks should be being addressed at the same time, for example by combining reporting Taskforce on Nature-related Financial Disclosures and [its climate equivalent] the TCFD. But if you want to shine a spotlight on, say, adaptation or nature, there is value in treating the issues separately.

Maria Nazarova-Doyle: When it comes to the perception that corporates don’t understand what needs to be done and that they are not taking action, I think you may find there is more happening than is immediately apparent. Companies may not be publishing adaptation plans, but the majority of companies are looking carefully at their business continuity and disaster recovery plans. It is sometimes the case that climate resilience is sitting in those operations teams rather than sustainability teams, but it is gaining traction nonetheless, just without a great deal of fanfare.

What more can be done to encourage action?

Chris Dodwell: Our experience is that corporates can have difficulties considering worst case scenarios until they have been through them. The utilities with the best climate risk plans in place, for example, are the ones that have already experienced disaster. Again, this is where the regulators can come in. In California, the regulator requires full climate adaptation and vulnerability assessments for all utilities.

Maria Nazarova-Doyle: The same thing is true with the pandemic. Everyone knew it could happen, but nothing was done to prepare. Now we have been through it, we will be more prepared if, or indeed when, it happens again.

Khadija Ali: While we have introduced new terminology like mitigation and adaptation, it can be easy to lose sight of the fact that we are still fundamentally talking about economic risks and opportunities – about sound business decision making. A balance needs to be struck between drawing attention to these topics with new terminology and recognising that this ultimately comes down to good business sense and a focus on risk and return.

David Carlin: My message would be, don’t let a crisis go to waste. As Maria says, we are more prepared for a pandemic than at any time in history, now that we have lived through one. Companies such as PG&E that have been sued into reorganisation will be best prepared for litigation risk.

No-one really pays attention to the safety announcements on airplanes, [but they wish they had when] they find themselves in an emergency situation. Governments really need to push organisations to do their homework when it comes to assessment, stress testing, resilience and contingency planning, otherwise most will wait for the worst to happen.

Manuel Vicente: In the banking sector, you have the risk community and you have the business community and at times the two do not fully operate in sync. This is a rare opportunity to bring those two sides together for a common goal. Banks can inform their client base on key vulnerabilities and adaptation investments needed, which results in lending more to clients in order to help them reduce their business resilience risk, with positive outcomes for all.

We just need to break down those risk versus business silos. I always tell the risk professionals I meet that this is their time to shine. They are no longer just identifying and overseeing risks, they are simultaneously identifying business opportunities, which creates a positive momentum across the organisation. Corporate client business resilience is ultimately the key outcome that both the business and risk teams wish to achieve.

Chris Dodwell: We just need to find a way to bring that momentum into our conversation with government. At the moment, governments’ first reaction is to view physical climate risk and resilience as yet another pressure on a public purse that is already under strain. They are scared to open up Pandora’s box. However, if we can shift that perception so that government understands this is about shifting pressure to encourage corporates so that they better manage their own risks, the narrative will start to change.

What we simply cannot afford to do, however, is to flail around for more than 50 years before we come up with an effective solution like we did with smoking. There are lots of investable opportunities out there today. We just need to speed up the process.