Too hot to handle? Shaping the Market for Climate Resilience

The heat is on, for people sweltering this summer. From wildfires in California to floods in Japan, via record temperatures across the northern hemisphere, climate change is making itself known. The question we have to ask is how well are we mobilising finance build resilience in the face of these impacts? Is the market for climate resilience heating up too? Or is it looking more like a damp squib?

Here at GCAP we have been advising climate finance institutions that invested over $10 billion in 2017 on climate action. In this blog we take a long view of how we view the market for climate resilience.

Three things you have to know about the climate resilience market:

• How big is the market today, and how might it grow?
• What drives the market forward?
• How do you identify opportunities for impactful investment?

In this blog series we'll dive into each of these topics, and along the way we'll hopefully learn something about entry points for understanding climate resilience, the toolkit for investors and measuring resilience outcomes.

How big is the market for climate resilience?

The Climate Finance Landscape report from 2017 showed finance was about $22 billion per year for the previous two years. More recently, the Multilateral Development Banks trumpeted their climate action in developing countries for 2017. While $35 billion was committed in 2017, less than $17 billion was for adaptation (and this includes co-finance).

Our benchmark of something less than $25 billion per year in the graphic here looks reasonable.

How big might this market be in 10 to 20 years?

The simple answer: much bigger if we have any hope of reducing the terrible toll of extreme heat waves in future. Let alone the impacts of super storms, floods and the disruptions to businesses with shifting climate regimes.

We believe this is an emerging market--far from the maturity and regulation of other financial markets, as problematic as they are. Climate resilience is marked by a lack of structure with competing interests looking to take advantage of short-term opportunities. 

Our graphic shows three pathways for growing climate-resilience finance:

The lower pathway is to protect current assets from extreme events, and grow asset protection as extreme events become more frequent and/or costly. At present, insurance covers about $100 billion per year globally, while the economic burden of weather related disasters averages about twice that. The costs in the US of weather related disasters in 2017 is well beyond this level, over $300 billion.This pathway will continue to grow, and feeds the larger stream of climate finance as well.However, it is a narrow definition of climate resilience as risk protection.

The largest investment stream at present that is closely related to resilience is towards the green economy and achieving the Sustainable Development Goals.Estimated expenditure of $1 trillion at present should grow somewhat over the next 20 years to have any hope of realizing the SDGs.Climate resilience is part of the SDGs and there are many ways in which climate-smart investment achieves multiple objectives with cost savings. This pathway is aspirational, valuing a vision of our planet as sustainable with development for all.

The upper pathway shows the total cost of climate change impacts may be $1.7 trillion per year by the 2030s to 2050s. This is a considerable gap between what we invest in today. The economically rational approach would be a 10-fold increase in adaptation finance, at a minimum.

Coming up: What drives the market forward? We next look at the drivers of climate finance more broadly and their interpretation for the future of climate resilience.

Look for our blogs in September:

• What are benchmarks for a mature climate resilience market?
• How do you identify opportunities for investment? 
  

Are you a finance officer looking for the next big thing in the climate space? Or an advocate of real impacts through public and private investment in our future? Get in touch for more insight from our market analysis.

Learn more about climate resilience and successful urban application in our programme in Lisbon.

For more information on the Multilateral Development Banks climate finance, see: https://www.worldbank.org/en/news/press-release/2018/06/13/mdb-climate-finance-hit-record-high-of-us352-billion-in-2017

Visit http://globalwarmingimages.net/ Ashley Cooper's powerful set of photos from around the world on climate change inspires action.

Blog Authors: Tom Downing & Ben Smith