Activating Private Capital for Climate Adaptation

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IGCC has released its new report, Activating Private Investment in Adaptation: Turning Capital Flight Risk Into the Next Multibillion Opportunity, showing what governments and investors can do to prevent capital flight from high physical risk areas and industries, instead enabling investment in adaptation and resilience from the asset level up to the whole-of-system level.

The report was co-written by IGCC and leading climate risk consultancy, ERM Energetics.

The Goal: Unlocking Private Capital for Adaptation and Resilience ​

• Economic Necessity: Australia needs billions of dollars in climate adaptation and resilience investments to maintain a vibrant and productive economy. ​
• Government Limitations: Federal and state budgets alone cannot cover the entire cost without cutting other critical public services, increasing borrowing, or raising taxes. ​
• Private Sector Potential: Australia’s $3.9 trillion superannuation sector and global capital markets could be a significant source of funds under the right conditions. ​

The Risk of Capital Flight ​

• Financial Rationality: Without intervention, it may become financially rational for private capital to withdraw from regions and industries with high exposure to climate damage and disruption. ​
• Bank and Insurer Actions: Banks have indicated potential withdrawal from exposed areas, and insurers are already raising prices, sometimes beyond affordability. ​

The new research report shows that to sufficiently scale up investment in adaptation and resilience, four core barriers need addressing:

Current Barriers To Private Investment in Adaptation

• challenges in quantifying the financial implications of physical risks and adaptation
• lack of market recognition for resilience in valuations
• difficulties in cost-sharing when adaptation benefits are spread across stakeholders
• asset-level resilience is normally insufficient to protect value if whole-of-system resilience is lacking.

These barriers are overlaid with investors’ fiduciary duties, which include meeting beneficiaries best financial interests.

Key Recommendations to Stimulate Private Investment In Adaptation

• The National Adaptation Plan should be legislated and on-par, in impact and prominence, with the Net Zero Australia plan. It should include:
  • a national objective for resilience, plus plans for key economic sectors.
  • a clear list of priority resilience projects (e.g., the Infrastructure Priority List).
  • resilience and adaptation plans for key economic sectors
• Investors should align their portfolios to the national resilience objective and plans, through target-setting and continuing progress.
• The mandates of all specialist investment vehicles (SIVs) expressly include adaptation and resilience (current SIVs include National Reconstruction Fund Corporation, Northern Australia Infrastructure Facility, Regional Investment Corporation, Clean Energy Finance Corporation, and Australian Renewable Energy Agency). SIVs have historically stimulated private investment alongside public funds.
• The government should invest in sovereign scientific capability and resources, including robust, high-resolution climate and hazard datasets and five-year scientific plans.
• Investors should rapidly build expertise in understanding and managing risks of climate-related damage and disruption.
• Governments should review relevant regulations, including town and landuse planning, so they consider resilience over the full expected life of effected assets.

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