Growing investment opportunities in climate adaptation solutions: abrdn

CLIMATE adaptation is often seen as the poorer cousin of mitigation, but the investment opportunity in this field is growing as the physical risks from climate change continue to increase, said Danielle Welsh-Rose, Asia-Pacific head of sustainability at abrdn.

As an asset manager, abrdn spends a lot of time estimating climate risk.

“When we’re looking at assets, we have to look at how exposed they are to physical impact,” Welsh-Rose said. Are companies doing enough to build resilience, for instance, so that they aren’t hurt by climate change?

Adaptation is the other side of that coin. “Obviously, this region (Asia-Pacific) needs to adapt to that physical impact. And climate change adaptation is an investment opportunity,” she added. 

Adaptation finance, however, is still nascent. Of the three investment pillars within abrdn’s climate transition bond framework, climate adaptation projects have the lowest allocation. 

The other two investment pillars are emission reductions from high-emitting sectors, and innovative climate solutions.

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Climate adaptation projects have historically been under-invested because the climate community’s focus was on containing climate impact through the reduction of greenhouse gas emissions.

Last year’s global stocktake – a report card of the progress made in addressing the climate crisis since the Paris Agreement – showed that adaptation finance made up 28 per cent of all financial support for climate purposes between 2019 and 2020.

Mitigation finance, in comparison, made up 57 per cent. The rest were for both mitigation and adaptation purposes. 

Another reason adaptation projects get less financing: They tend to be public infrastructure projects, such as coastal defences or drainage systems, which do not lend themselves to commercial financing models.

Climate mitigation projects tend to be productive assets. A solar power plant, for instance, can deliver an income upon completion, but a flood barrier will not.

Most of abrdn’s debt investment in adaptation is in government-issued green bonds tied to a climate adaptation purpose, such as building flood mitigation infrastructure. 

In the equity space, Welsh-Rose flagged potentially attractive investment opportunities among companies developing fire-resistant materials.

These materials could become important amid rising incidences of bushfires as the planet heats up.

Welsh-Rose said investors’ earlier hesitation to focus on climate adaptation has been driven partly out of concern that doing so may take the focus away from mitigation. 

“It’s also partly to do with a little bit of human nature. If we talk too much about adaptation, does that mean we expect that the world’s going to be a terrible place?”

Yet, all available metrics indicate that the world is not on track to meet the target of limiting global warming by 1.5 degrees Celsius. This means the urgency of financing and implementing adaptation solutions has increased.

There is concern that some institutional investors in the United States are no longer as committed to climate-driven investment principles, but Welsh-Rose disagreed with this interpretation.

Several investors, including State Street, have pulled out of climate-focused alliances over the last few months. These withdrawals are more likely because institutional investors are trying to avoid violating antitrust regulations, she said.

Various US regulators have indicated that collective action by companies and investors to reduce emissions or combat climate change could be in breach of antitrust laws. An agreement to impose net-zero emissions goals, for instance, could amount to a boycott.

The commitment to emissions reduction remains intact, she said, and there is little sign of spillover effects on other markets. 

For abrdn, the regulatory environment means the fund has to be a lot more careful about the claims it makes around sustainability – especially in the US market.

Welsh-Rose sees this as a positive development, though, as it helps maintain trust in the industry when fund managers exercise greater discipline around the environmental, social and corporate governance claims they make. 

The global asset manager’s assets under management (AUM) for investments stood at £366.7 billion (S$622 billion) at the end of 2023. 

Funds categorised under Article 8 and 9 of the European Union’s Sustainable Finance Disclosure Regulation – or funds that promote environmental or sustainability characteristics – make up 14.7 per cent (£54 billion) of the total AUM.