To name a few, in Iran and Afghanistan, tensions have been rising over water rights fueled by severe drought in the region [1]. In Vietnam, climate change has forced millions of people to flee their homes in the Mekong Delta [2].

Europe hasn’t yet experienced such social friction due to climate change, however, a series of climate-related events, from early wildfire seasons [3] to floods [4], sea-level rise [5], and droughts [6], have caused billions of euros in damage [7] and have started to affect citizens’ life and businesses, such as in the agricultural sector.

Asked how much warming above pre-industrial times is likely by 2100, 60% of the authors and review editors of working group 1 for the Intergovernmental Panel on Climate Change (IPCC) Sixth Assessment Report, replied “3°C or more”, and 82% said that they expect to see catastrophic impacts of climate change in their lifetime [8]. At the same time, the level of public concern about climate change in the UK is continuously increasing: in a recent survey, 65% declared that they already feeling the effect, and 25% think that this threat is ‘out of control’ [9].

As it becomes more and more likely that global warming won’t be limited to 1.5°C, and with extreme weather events already occurring more frequently and public concern surging, governments have started to take action: Spain recently approved an €2.2 billion drought response plan [10], while France launched a consultation to propose the inclusion of a +4°C trajectory in scenarios used in adaptation planning [11].

As El Niño drives global temperature records in the coming years [12], the focus on climate adaptation strategies is likely to increase. In this paper, we take a closer look at the risks that Europe is facing, how these are being addressed in National Adaptation Plans (NAP), and how these plans have been and will be financed through Sovereign green issuances.

As Europe is not a unified climate zone and biogeographical region, climate risks differ between regions. The European Environment Agency (EEA) is aggregating projected changes in climate-related hazards across Europe [13] following the classification adopted by the IPCC in its Sixth Assessment Report (see below).

Projected Changes in Climate-Related Hazards Across Europe during the 21st Century

Source: EEA [13]

These risks could have very material effects on a number of industries: they could cause net yield losses from agriculture in the EU and the UK, a decrease in marine sea food production, or negatively impact critical infrastructure – some scenarios estimate that the climate risk to which energy, transport, social and industrial infrastructures are exposed could be close to €20 billion per year in the 2050’s (see figure 1). Thus, it is crucial for Sovereigns to prepare robust and credible National Adaptation Plans (NAP).

Figure 1: Overall climate hazard risk to critical infrastructures in Europe

Source: IPCC [14]

The EU first outlined the challenges around climate change adaptation in a White Paper published in 2009 [15], concluding that adaptation would require action at all levels and close coordination with diverse stakeholders. In 2013 [16], the EU committed to supporting international and national efforts in addition to launching a broader adaptation strategy: “The EU Strategy on Adaptation to Climate Change’ sets out eight actions and outlines how the EU intends to fund, research, and promote adaptation alongside creating/developing climate-proof policies. One of the eight actions involves encouraging all EU Member States to define and adopt comprehensive national adaptation strategies (NAS), which will be published on an ‘Adaptation Readiness Scoreboard’ [17]. This scoreboard assesses each Member State’s adaptation policy, the contents of its NAS, and looks at the quality of national vulnerability assessments, knowledge creation, mainstreaming into sectoral policies, and funding mechanisms.

Furthermore, the Commission has supported the development of the Climate-ADAPT platform, which has become a centralised source for knowledge on adaptation [18].

Most recently, a full update to the EU Strategy on Adaptation [20] was conducted in which the Commission notably committed to:

• Enhanced collaboration with Member States and other official institutions
• Strengthen the dialogue between the public and private sector
• Explore the wider use of financial instruments and innovative solutions
• Develop data
• Research provisions
• Build tools to identify the most impactful adaptation and prevention projects

Most notably, the EU also committed to work with African and other initiatives to support regional adaptation and disaster risk management worldwide. However, Member States will continue to be the main implementation partners, and the EU will serve to aid their adaptation needs – emphasising the importance of their adaptation strategies.

National Adaptation Plans of European countries typically provide details about the general and strategic direction of the strategy/plan, the risks posed to the nation, the objectives of the plan, and the actions to be taken.

Below we provide a short overview of the key thematic objectives within the strategic summaries provided by the governments in the UK [21], Spain [22], the Netherlands [23], and Germany [24].

• Emphasis has been placed on the urgency of climate adaptation to avoid or reduce present and future damage from climate change
  
• There is a need to increase the awareness of the importance of climate adaptation
• It is essential to generate new knowledge around the design and evaluation of adaptation strategies and measures
• Effective adaptation will require the mobilisation of the public and private sector, and governments will need to promote information sharing, social participation, and capacity building
• The planning and development of appropriate actions will require active monitoring to ensure the development of robust processes, allowing for the implementation of the best available scientific approach
• Embedding climate change adaptation into policy and legislation will be necessary

The need for action has been acknowledged by all states as the negative effects of climate change are increasingly becoming visible and have been proven. Governments require a multi-faceted approach whereby they utilise all the tools at their disposal, such as financing, policymaking, collaboration, and legislation, to avoid large-scale societal and economic challenges.

The countries we examined [25] have flagged similar potential risks, with few highlighting the specific risks attributable to their unique climate. The national strategies recognise that the impacts of climate change, if left unchecked, will be sweeping across several parts of society – beyond the immediate effects to the environment.

However, it seems that the identified risks remain high level. They could be outlined more specifically for each country, given their individual climate profile (as identified previously by the IPCC).

The Netherlands offers a  good case study with the Dutch Delta Programme, which provides extensive consideration of flood risk given its unique exposure to sea level rise compared to the rest of Europe.

Common risks

• Increased flooding likelihood and coastal change impacting communities, businesses, and infrastructure
  
• Risks to health, well-being, and productivity due to elevated temperatures
• Risks of shortages in the water supply, and for agriculture, energy, and industry
• Risks to natural capital, including land, coastal, marine and freshwater ecosystems, soils, and biodiversity
• Risks to domestic and international food production
• New and emerging diseases, and invasive non-native species, affecting people and ecosystems

  Country-specific risks

• Spain: Increased risks of wildfires and desertification
  
• Spain: Negative impacts on cultural heritage sites and tourism
• Netherlands: Flood risks (references to the Delta Programme)

As the negative impacts of climate change continue to be felt, the risk lies in seeing countries developing more detailed strategies around country-specific challenges on a reactive basis rather than adopting the proactive approach originally sought after.

The above-mentioned action plans vary in quality and relevance. Some observations:

• Timeliness and accessibility: The Dutch plan provided analysis for the 2018-2019 period and appears to not have been updated. Furthermore, some plans (e.g., Italy and France) have not been made available in English, making it challenging for international stakeholders to understand.
  
• Accountability: Whilst a great number of measures are outlined in the UK NAP, there is a notable lack of legally binding commitments and specific policy/legal developments that would cement the UK’s commitment to these specific objectives. The Environment Act 2021 does set out legally binding targets to restore nature, but these are more closely related to climate change mitigation than adaptation, and the targets apply to a much longer time frame.
• Urgency: Though the Dutch plan is now out of date, it was notable that it outlined immediate actions that the government intended to take in the coming years – recognising that climate change adaptation is a highly relevant challenge in the near term. This is in contrast to the UK’s NAP which was set against the 25-year plan alongside other climate objectives such as mitigation, which fails to capture the urgency of adaptation.

The EU Adaptation Preparedness Scoreboard itself also notes some areas for improvement for the Member States. These include: 

• Governance structures for adaptation policymaking must apply a greater sectoral focus
  
• Specific knowledge gaps need to urgently be addressed
• The availability of up-to-date adaptation-related data to national stakeholders similar to the Climate-ADAPT platform - has to improve
• Disaster risk management and climate adaptation are interlinked and therefore require a coordinated approach
• More robust monitoring systems for adaptation need to be put in place, and member states must ensure stakeholder involvement in their assessments

Apart from the (constructive) criticism, it’s important to emphasise that there are also positive examples of national action plans providing strong commitments and detailed disclosures: 

• Level of detail: The UK National Adaptation Plan is tied to a 25-year period and provides a highly detailed goal-by-goal breakdown of the actions the government intends to take to achieve its goals and deliver climate adaptation measures. The actions outlined include: which government ministry will be responsible for delivery; any relevant, applicable international treaty; areas of research the government will finance; data collection/distribution frameworks; monitoring tools; and policy development intentions.
  
• Legally binding commitments: The German Climate Change Adaptation law, published in July, wrote into law the strategic framework for future climate adaptation at a federal, state, and local level. The government aims to develop climate adaptation concepts at all levels by systematically conducting an impact analysis, and by planning appropriate measures.
  

Most notably, many Member States do not have reliable funding in place to deliver their plans.  This is contradictory to their wider climate change efforts which have only grown in relevance and resourcing. One reason for the lack of funding could be that many countries are placing a greater emphasis on goals attributable to climate mitigation (e.g., the Paris Agreement’s commitment to limit temperature increases to 1.5C above pre-industrial levels), with climate adaptation therefore dropping on the sustainability-related list of priorities.

Overall, it is clear that there are shortcomings in the approach European countries take to adaptation. However, the region continues to be widely recognised as a global leader in sustainability. Their NAS and/or NAPs certainly show a higher baseline of readiness than what was in place before their formulation, and the introduction of the EU’s updated climate adaptation plan should further serve as a valuable catalyst for the Member States to build out their NAPs. 

Most European countries have developed a Green Financing (Green Bond) Framework, enabling them to direct financing towards green expenditure. Climate change adaptation projects are financed via these frameworks, however, the portion of funds allocated towards adaptation varies widely among sovereigns, with the focus so far firmly on climate change mitigation projects. Yet, it feels the acceleration of the visible effects of climate change and their impact on a country’s risk profile might shift the status quo.

Looking at individual countries, the Netherlands is directing more financing towards adaptation than any other EU state, with more than 40% of proceeds going to the Delta program [26] to support projects for flood risk management or defense. The Dutch government has also utilised the 40% figure as a tool to raise awareness amongst government, the public and private sector, and its citizens that climate adaptation task is urgent. This approach highlights the dual benefits of green financing programs: driving funding towards green projects, but also acting as an accelerator and tool to raise awareness for a specific climate issue. Furthermore, it showcases the proactiveness of the Netherlands, which could benefit the state as an issuer in demonstrating its level of readiness, and consequently its ability to manage and potentially reduce climate risk at country level.  

Elsewhere in the EU, the allocation for climate adaptation vary massively - despite a wide array of potential adaptation projects eligible in their green finance frameworks. One caveat: in some EU countries, adaptation measures fall into the remit of regional and/or local authorities and are therefore not listed as eligible projects in the green financing frameworks on national level. France is one example for such an approach.  

The other point to note is the focus on flood prevention projects, as well as – to a lesser degree – on research and technologies that enable adaptation to be measured and future weather events to be forecast.  This can explain some of the shortcomings of identifying unique country climate risks we have discussed earlier. Once the right technology is in place and extreme weather events can be properly captured, we expect to see more projects at a national level focusing – and expenditure allocated – to tackle the consequences of heat waves, wildfire, or droughts and its effect on agriculture or habitability of some populated areas. 

Climate Change Adaptation (UK)

Project example in the Green Framework:

• Flood protection, resilience and other risk mitigation programmes
  
• Data driven climate monitoring solutions
• Engineering activities and technical consultancy dedicated to adaptation to climate change

Project example – EA Floods Program. Total allocated in to adaptation projects (in %) – 12.9%.

Adaptation (France)

Project example in the Green Framework:

• Develop climate change extreme weather events observation systems and support adaptation related research, and develop adaptation related infrastructure
  
• Main Green Eligible Expenditures
• Atmosphere, oceans and biosphere monitoring systems
• Research on adaptation systems and infrastructures

Project example – Multiple climate adaptation projects. Total allocated to adaptation projects (in %) – 15.9%.

International Cooperation Research, Innovation and Awareness Raising; Agriculture, Forestry, Natural Landscapes and Biodiversity (Germany)

Project example in the Green Framework:

• Contributions to international funds, such as Adaptation Fund, multilateral institutions and international organisations
  
• Research related to climate change, biodiversity, nature protection and the environment
• Research on coastal, oceans and polar areas
• Grants for the management of extreme weather events and flood in natural landscapes and coastal areas
• Grants for research on climate change adaptation in framing areas and forests

Project example – Funding Programme “Measures to adapt to climate change” (in %) – 13.1%.

Climate Change Adaptation & Sustainable Water Management (Netherlands)

Project example in the Green Framework:

• Expenditures under the Dutch Delta Programme to ensure flood risk management, freshwater supply and spatial planning will be climate-proof and water-resilient
  
• Expenditures include reinforcing flood defenses, monitoring and management of water levels, water treatment & distribution and related measures to improve quality and anticipate higher (fresh) water levels

Project example – Delta Programme (in %) – 43.3%.

Adaptation to Climate Change (Spain)

Project example in the Green Framework:

• Eligible climate change adaptation expenditures include, among others, measures that improve and ensure resilience against the negative effects of climate change (adaptation to extreme and slow-onset weather events)
  
• Measures that strengthen and increase the resilience of the coastline to the impacts of erosion, flooding and the effects of climate change on the coastal strip

No Project Example Available

Protection of the environment and Biological Diversity (Italy)

• Project example in the Green Framework:
  
• Sustainable land use and protection as well as protection and restoration of terrestrial and marine biodiversity and ecosystems & water collection and saving
  
• Security of water supply
• Sustainable management of water resources
• Investments aimed at reducing losses in water distribution networks

Project example – Soil protection and hydrological disaster mitigation % M.O.S.E system and safeguarding of the Venetian lagoon (in %) – 11%.

Living Resources and Land Use (Belgium)

Project example in the Green Framework:

• Operating expenditures of academic research programmes I biodiversity climate change and other global environmental challenges 
  
• Investment expenditures for soil rehabilitation and biodiversity restoration
• Investment in sustainable programmes for climate change mitigation and adaptation in developing countries whilst enhancing biodiversity

No Project Example Available

Climate Change Adaptation (Ireland)

Project example in the Green Framework:

• Flood relief and other risk mitigation programmes
  

Project example – Flood Risk Management (in %) – 3%.

The recent introduction of sovereign Sustainability-linked Bonds (SLBs) could also bring an interesting angle to the discussion on funding climate change adaptation. By nature, the SLBs focus on outcome and hence could be a tool to encourage policies that mitigate climate transition risks by means of adaptation. So far, Chile and Uruguay have focused on KPI-linked bonds to fund the delivery of climate change mitigation objectives such as greenhouse gas (GHG) reduction targets, or the protection of biodiversity. 

As reviewed in this article, climate change adaptation has been on the agenda of the EU and sovereigns (within and outside of the EU) for more than a decade now. The speed at which climate change is accelerating calls for intensifying actions related to adaption to protect our society and economies. 

The investor community is starting to focus on this aspect, not only from a risk management point of view but also as part of their strategy to deliver sustainable returns to their clients [27]. The long-term consequences of climate change aren’t yet reflected by the market in spreads or credit risk, however, the rise of visible effects of climate change, citizen awareness, investor scrutiny, and detailed reporting obligations for the private sector, could and should create the perfect ground for more actions. Looking ahead, from a financial market and valuation point of view, we imagine a differentiation of sovereigns who are better positioned to face the upcoming challenges, driven by the pricing of those risks and opportunities, as well as investors’ increasing scrutiny.

References

[1] AP News - Iran exchanges heavy gunfire with Taliban on Afghan border, escalating tensions over water rights

[2] Vietnam Chamber of Commerce and Industry and Fulbright School of Public Policy and Management - Annual Economic Report Mekong Delta

[3] Euronews - France sounds the alarm as forest fire season starts early due to climate change

[4] The Guardian - After the floods: Germany’s Ahr valley then and now

[5] Royal Netherlands Meteorological Institute - Sea Level Monitor

[6] France 24 - ‘The country is becoming a desert’: Drought-struck Spain is running out of water

[7] European Environment Agency - Economic losses from climate-related extremes in Europe

[8] Nature - Top climate scientists are sceptical that nations will rein in global warming

[9] IPSOS – Political Monitor

[10] The Guardian - Unprecedented €2.2bn drought response plan approved in Spain

[11] Ministère de la transition écologique et de la Cohésion des territoires - Trajectoire de réchauffement de référence : ouverture de la consultation publique

[12] World Meteorological Organisation - Global temperatures set to reach new records in next five years

[13] European Environment Agency - What will the future bring when it comes to climate hazards?

[14] Climate risks to critical infrastructures, aggregated at European (EU+) level under the SRES A1B scenario (Forzieri et al., 2018)

[15] Adapting to climate change: Towards a European framework for action

[16] The EU Strategy on Adaptation to Climate Change

[17] Adaptation Preparedness Scoreboard – Country Fiches 

[18] Climate-ADAPT

[19] EU Adaptation Strategy 

[20] EU Climate Adaptation Strategy

[21] Third National Adaptation Programme 

[22] The Spanish National Climate Change Adaptation Plan 2021-2030

[23] Implementation Programme 2018-2019

[24] Climate Adaptation Law - https://www.bmuv.de/DL3128

[25] UK, Spain, Netherlands and Germany

[26] State of Netherlands - Green Bond Report 2023 

[27] Franklin Templeton Fixed Income Weathering the storm: Exploring climate change adaptation and the investor’s imperative | Franklin Templeton