Fighting Fire with Finance: Investing for Climate Adaptation, Resilience and Growth

Risks associated with extreme weather and resource scarcity are raising the urgency to establish financing pathways for scalable solutions focused on building organizational resilience.  

The public and private sector globally has largely focused on sustainability and mitigation strategies, particularly in the labelled bond market. But investment in adaptation and resilience, from strengthening infrastructure against extreme weather to improving recovery after climate-related disasters, represents both a challenge as well as an opportunity for investors.  

That was a central theme of the “Fighting Fire with Finance: Investing for Climate Adaptation, Resilience and Growth” panel discussion that I joined at this year’s Sibos conference in Miami. The panel also featured:  

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  Gisela Sánchez, Executive President, Central American Bank for Economic Integration (Moderator) 

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  Ellie Moriearty, Program Lead, Economic Prosperity, MIT Solve 

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  Sven Schmidt, Head, International Trade Finance Operations, Commerzbank AG.  

Here are some of my takeaways: 

Over the past 20 years, about US$5 trillion in Sustainable Bonds have been issued, including close to US$1 trillion in new issuance expected this year alone. Public issuers such as France, Germany, and Canada, as well as various development banks, all have robust and active bond programs.  

However, most of the projects funded by Green Bonds to date focus on mitigation, and a shift is underway towards financing solutions that support nature-based strategies and resilient infrastructure. Tokyo’s €300-million Climate Resilience Bond last year illustrates this. The issuance, used to fund flood mitigation measures and help future-proof the city, was seven times oversubscribed.  In a recent survey conducted by BMO of top North American institutional investors, we found strong demand for financing opportunities across different resilient natural systems and infrastructure types.  

Adaptation projects can be difficult to finance because they lack direct revenue streams. Creating a secondary revenue stream either through fees, insurance products or carbon credits, or by linking up with a revenue-generating infrastructure or real estate development, is a way to court more institutional investors and attract more private capital.  

Resiliency and adaptation themes are also factoring into overall credit profiles and credit ratings. For instance, water scarcity in Corpus Christi, Texas was widely believed to have contributed to a rise in the city’s borrowing costs over the past two years. I expect we’ll see more examples like that, particularly for public sector issuers.  

Business leaders are actively making investments that will result in their companies being more resilient to climate risks. Fellow panellist Sven Schmidt noted several examples in the past year alone, pointing to the heat wave that gripped Germany this past summer and cost the economy €500 million per day. High temperatures and a lack of rain lowered Rhine River water levels, preventing businesses from using the river to transport goods and severely impacting companies that rely on the waterway to maintain their normal operations.  

Scale has been another challenge for organizations seeking financing for adaptation and resiliency projects. Ellie Moriearty provided an overview of the innovative climate adaptation and resilience solutions she encounters at MIT, but many founders are still looking for seed capital.  

For investors and institutional banks, scale matters. Underwriting a $1 million project-finance opportunity can take as much work as a $100 million one, because smaller projects often involve proponents with less of a track record and therefore require more nuanced diligence.  

While this is a challenge, there are ways to address these gaps in the market. One way is to use blended financing, working across the capital stack by combining different types of funding, including private, public, and philanthropic, that may have different objectives and risk tolerances. Catalytic capital could also be a way to bring more private capital into projects. That’s public or philanthropic funding with a different risk/return profile, making an early-stage or higher-risk project safer for banks and commercial investors to finance. 

Another approach is to bundle projects across regions, sectors or themes to create larger opportunities that could be more attractive to institutional investors.  

While the challenge of scale is significant for developing sustainable finance approaches to resilience and adaptation, it can and should be addressed. These are precisely the projects that we need to succeed in order to mitigate the worst impacts of a warming planet.