With climate physical risks increasingly becoming reality, it’s imperative for companies to understand how investors are evaluating climate adaptation of their investment targets in their investment strategies. NatWest’s 20th ‘What sustainable investors want’ webinar delved into the pivotal factors shaping this investment focus, with expert panellists sharing their insights on climate adaptation assessment and investment. 

Moderated by Dan Bressler and Vishal Saxena from our Sustainable Finance Advisory team, Dr Julie Gorte, Senior Vice President for Sustainable Investing at Impax Asset Management, and Shubha Samalia, ESG Macro Strategist at NatWest, shared their observations and thoughts about defining climate adaptation, investment decision-making in the climate adaptation context, and the role of financial instruments. 

Their discussions focused on defining climate adaptation, investment decision making in this context and the role of adaptation in financial instruments. The key messages from the conversation are as follows:

• While climate mitigation aims to reduce greenhouse gas emissions to avert further climate change, climate adaptation focuses on modifying practices and policies to cope with the existing impacts of climatic shifts. Both approaches are equally vital in tackling the challenges posed by climate change. 
• Climate adaptation has become an urgent necessity in our warming world, as - irrespective of future mitigation successes - the repercussions of climate change have already begun to manifest. The increased frequency and intensity of natural disasters disrupt economic stability and inflicts significant damages across various sectors, such as infrastructure, housing, and agriculture, with emerging economies suffering the most.  
• Resource constraints pose additional hurdles in addressing these climate-related challenges. Confronting these issues on country level requires significant investments and expertise - a considerable hurdle for many central banks limited by finite budgets. Furthermore, certain mandates may also restrict banks from fully engaging with climate issues, particularly in regions where climate change is seen as beyond their core responsibilities. 

• As climate-related risks escalate, adaptation is becoming a crucial component of strategic financial planning and investment. 
• Understanding how businesses prepare for, respond to, and manage climate risks is increasingly important for investors aiming to navigate these emerging challenges. The panellists highlighted the need for comprehensive data to evaluate if companies are sufficiently prepared for climate change impacts. Investors require clarity on the locations of a company’s critical assets, the risks those assets face, and the measures taken to bolster resilience against climate-induced disruptions. 
• For instance, companies reliant on electricity and water infrastructure must articulate their strategies for managing potential changes to these essential services. Similarly, firms operating transport networks need to assess the vulnerability of port facilities to rising sea levels and severe weather events. Insights into these critical factors are essential for investors aiming to forecast the future financial stability of companies within an increasingly climate-affected landscape.

• The panellists acknowledged that climate risks now represent a significant consideration for financial stability, especially as the ramifications of physical climate risks on economic growth become ever more apparent. 
• Utilising specific ESG bond labels can direct investments toward projects that bolster climate resilience. However, the success of these financial instruments relies on the development of clear, standardised metrics and criteria to evaluate adaptation project outcomes. 
• The panellists advised issuers to take cues from banking strategies, such as incorporating climate-related financial risks into credit assessment frameworks and adjusting portfolios to favour environmentally sustainable investments. By leveraging these strategies, issuers can forge strong pathways for financing climate adaptation, harnessing public sector support while engaging private investors. 

Please find the full replay for the webinar here. For both speakers’ insights on climate adaptation and its application, you can listen to this podcast with Dr Julie Gorte and read Shubha Samalia’s recent publication on the future of mobility.