Adaptation Finance is Having its 'Don’t Look Away' Moment

Adaptation is the black sheep of the climate finance family.

To some, calling for investment in adaptation is seen as an admission of defeat — a tacit acknowledgment that the fight for global net-zero emissions is over, and that the promise of the Paris Agreement has been irrevocably lost. This view was on display in the reaction to a recent Morgan Stanley report advising investors to prepare for 3°C of warming.

But a growing number of investors understand that we need more dollars to flow to adaptation in order to safeguard lives and livelihoods. The world is currently falling short of its decarbonization targets, and there’s a dawning realization that certain climate impacts are already locked in because of the amount of human-induced greenhouse gases already in the atmosphere. The facts being what they are, investing in adaptation should be a no-brainer.

Still, rallying capital to the cause is proving difficult, as a panel of adaptation finance pros explained at the ClimateTech Connect conference in Washington, DC yesterday (April 16).

“Awareness is very, very high that resilience is needed, but understanding of what can be invested in is very, very low,” said Stacy Swann, Founding Member of Resilient Earth Capital, an investment community focused on early-stage adaptation opportunities. 

One challenge is that the would-be buyers of adaptation solutions — corporates, states, and municipalities, to name a few — are still having trouble articulating the business case. While investing in adaptation is a “social good”, Swann explained that the way to open wallets is by stressing the cost savings, revenue enhancements, and other financial perks that come with it.

This advice holds true for adaptation startups, too. Alex Behar, Partner at venture capital (VC) firm Buoyant Ventures, argued that fledgling companies can attract investor interest by addressing costly climate-related problems in the here and now. “That’s what’s going to make the most sense. A lot of opportunities that are trying to look out to 2050 or even to 2030 — it’s going to be very difficult,” he said.

Emilie Mazzacurati, Co-Founder and Managing Partner of Tailwind Climate, an investment firm for early-stage adaptation companies, highlighted another must for wannabe VC-backed adaptation companies. “You need to make money,” she said. “It’s stating the obvious but it’s an important reminder because people kind of think of adaptation as a charitable endeavor, and there’s a lot of charitable and public money that is needed for things that are not monetizable. What we’re trying to do is to show that you can make money in adaptation — not because we’re ruthless profit-seekers, but because we think that’s how we’re going to bring more private capital to the table.”

As things stand, the private sector is “not doing its share” when it comes to adaptation investment, she added. A recent analysis by Tailwind found that pure play adaptation startups receive only 3% of total climate tech funding, and that less than half of a sample of 80 corporations disclosed any kind of adaptation and resilience budget at all.

There’s also a clear bias among private investors when it comes to the types of adaptation startups they want to support. “I think the risk analytics and InsurTech space are faring better. There is much more interest and traction and proven exits in that market. We see a lot of startups that do more physical solutions: new building materials, new technologies that help address the impacts of climate change in real life — that’s harder to fund right now,” said Mazzacurati.

Behar at Buoyant, though, offered a qualified defense for VC world’s focus on software over ‘hard tech’. “Part of the reason we invest in digital solutions is that we feel like they can scale faster,” he said. This “buys time” for other startups creating first-of-a-kind solutions to build out monetizable offerings, he added. In other words, the financial success of fast-to-scale software startups unlocks resources that VCs can put to work on longer-term bets. This investment thesis is reflected in Buoyant’s portfolio, which includes digital solutions companies like FloodFlash and Sunairio.

Mazzacurati agreed that ‘scalability’ is essential to powering the adaptation market. “The goal of innovation is to do things better, faster, cheaper. Right now, a lot of the innovation that we see is better rather than cheaper. And to get to cheaper, we need scale. If we can crack that nut and show that one can make money by investing in an adaptation startup, that corporations can have a great return on investment … then we can bring a lot more money through the private market,” she said.

Panelists were quick to point out, though, that not every adaptation solution could or should vie for every available private sector dollar. Swann at Resilient Earth Capital warned that adaptation entrepreneurs should take care to bring in the right capital at the right time. “Sometimes we see some people trying to go after all sources of capital at the early stage, and that can be to their detriment,” she said. Companies that don’t generate sufficient profits should steer clear of debt financing, for example. “Debt is very important for growth — but not at certain points in your growth. And you can over debt yourself, over leverage yourself, and that can kill a company,” she said.

Other adaptation solutions may always find the private markets shut off to them. That could be because they aren’t money-spinners. Or it may be because they have to be implemented on shorter time scales than private markets can manage. A hefty chunk of the adaptation portfolio, therefore, will have to be financed by the public sector. “There’s a lot of things on the public balance sheet that are on the public balance sheet because they don’t have anywhere else to go,” said Jeff Schlegelmilch, a Director at Columbia Climate School. 

These adaptations — chunky pieces of infrastructure, highly manual landscaping work, fiddly home retrofitting efforts and the like — have in the past been bankrolled by federal, state, and local governments. But public finance for adaptation and resilience is evaporating at frightening speed under the Trump administration. Earlier this month, the Federal Emergency Management Agency (FEMA) halted US$882mn of Building Resilient Infrastructure and Communities (BRIC) grants, which go toward weather-proofing buildings, undergrounding power lines, and protecting wastewater facilities from flooding, among other things.

Schlegelmilch’s fear is that Trump’s war on federal spending will cause many of these important adaptation programs to wither and die — without hope of a lifeboat from the private sector. However, he also believes political and practical pressures could lead the White House to reverse some of its early policies and restore funding for adaptation and resilience under a new banner. “We sort of need to figure out what’s real and what’s bullshit in terms of everything that’s being done, which programs are really gone and which ones are going to come back. There are certain political incentives that show up at the ballot box that I think are going to make it harder to permanently repeal of some of these things,” he said.

Of course, this is speculation. The only thing that’s certain is that the financing landscape for adaptation as a whole is tougher and less stable than it was before the inauguration. Perhaps the only consolation is that the chill is being felt across sectors and investment themes. 

Another yet-to-be-answered question is how far US policy will hobble private markets, too. Behar said venture capital is already facing “a huge challenge” across all sectors because “there are not enough exits”, meaning startups aren’t being bought up by larger companies or going public at a pace needed to satisfy VC funds’ limited partners (LPs). He says the industry should hope for more exits by large, mature startups — not necessarily those in the climate sector — just so that LPs get paid out and reinvest in climate adaptation funds. A darker outlook for the US economy due to Trump’s economic and trade policies, however, could lead big private companies to shy away from public stock offerings, slowing down the velocity of venture capital. 

In spite of these current and potential headwinds, though, Mazzacurati said the adaptation investment thesis is gaining traction with the capital holders she’s talking to. “I’m finding that the argument is becoming increasingly easy to make, which is selfishly good news in the big picture of bad news. Nobody likes a 3°C degree world, but there’s a growing consensus around the fact that it [adaptation] is not giving up on mitigation. We have passed that stage. We still need mitigation, and we need adaptation.”

Thanks for reading!

Louie Woodall
Editor