This is Tom rowlans Reese and you're listening to Switched On, the podcast brought to you by BNF.

We often think about climate action in terms of cutting emissions, but adaptation is also an important part of the story for investors, businesses, and governments.

Building resilience is becoming central to long term strategy.

It's about understanding risk, responding to change, and finding opportunity in how the world around us evolves.

On today's show, we're going to bring you something different from our usual BNF analyst interview.

Coby bavna Agri, BNF's head of strategy and Switched On host, is going to read his recent note titled Adaptation and Resilience the New Investment Imperative.

In it, it explores how climate adaptation is shaping decisions across finance, policy and industry, and what building resilience means for future economies.

BNAF clients can find this note, along with other climate and adaptation research, by heading to BNF go on the Bloomberg Terminal, or visiting BNF dot com to learn more about how BNF approaches strategy.

Research on the energy transition, including developments in commodity markets, sector trends, and the technology shaping the future.

Find more information at bienf dot com.

So let's see how adaptation is moving from concept to action with.

Cobalt adaptation and resilience the new investment imperative.

Of all the things a power system operator, worries about jellyfish are probably not one of them.

But in August, a swarm of barrel jellyfish were sucked into the cooling system of Western Europe's largest nuclear power station, shutting down the plant for ten days.

A marine heat wave had triggered a bloom of the jellyfish, who today have far fewer natural predators to keep their numbers in check.

This curious example demonstrates how exposed human systems are to the physical impacts of climate change and nature loss, which are mounting rapidly.

Climate damages from fire, flood, and storms cost the world's economies one point four trillion dollars in twenty twenty four, up from one hundred and fifty billion in the year two thousand.

In twenty twenty four alone, the damage bill in the US hit nine hundred and twenty four billion dollars, which equates to three point five percent of its national GDP, with virtually every year breaking the temperature record, These financial impacts are only going to get worse.

How much worse?

In its latest update, the Network for Greening the Financial System estimated that GDP would be reduced by fifteen percent in twenty fifty under current policies, using a top down methodology, which falls within the range of other sources which show a one to nineteen percent reduction in GDP by twenty fifty.

While these estimation techniques face some criticism, bottom up methodologies that usually produce much lower totals are intuitively under estimates.

How can they anticipate the many unexpected impacts of warming Like the jellyfish.

Even if you wish to be optimistic and plan for the world hitting net zero by twenty fifty, I'm afraid the impact is still stark a seven percent GDP impairment by twenty fifty according to the NNGFS.

None of these estimates include the impacts of nature loss, which would likely add trillions more to the damage bill.

Shielding the economy, businesses, and people from these damages is the goal of climate adaptation.

Adapting to climate change will require hundreds of billions and possibly trillions of dollars of investment in everything from sea walls to seed science.

The best estimate is that we are currently spending only about sixty five billion dollars per year.

The mounting damager's bill we are already facing suggests that scaling this investment needs to be an imperative now.

The difficulty is that climate risk is mispriced, the market signals for investing in adaptation are absent, underdeveloped, or weak.

Political focus on adaptation has also always lagged mitigation, in part because focusing on adaptation can feel like an admission of defa.

But as the numbers I mentioned before show, climate damages are already here and the need for adaptation is not about giving up on reducing emissions.

It is prudent risk management.

The key question is how do we scale the necessary investment.

The answer is by turning risk into opportunity.

Who and what will make the money flow.

Investment in adaptation currently comes from four main sources.

Governments, corporations, financials and individuals.

Will unpack where each of them are on the adaptation journey.

Governments slowly getting into gear, but don't expect trillions.

Public sources like governments and development finance bodies have so far contributed the lion's share of funding for adaptation, accounting for ninety percent of the total, or about fifty eight billion dollars in twenty twenty three.

Yet government's focus so far has mostly been on planning rather than implementation.

According to the UN, eighty seven percent of govern have produced a national adaptation plan or some form of planning instrument, as encouraged by the Paris Agreement.

Leading countries such as Canada and Singapore have gone further, legislating national adaptation strategies and dedicating recurring budgets.

However, many adaptation plans are flimsy or outdated.

This uneven progress should worry business and investors because a country's preparedness for climate impacts will shape the probability of loss for the assets, companies, and societies located in it.

Many of the financial impacts of climate change are beyond any single entity sphere of control.

A firm could build the best flood defense in the world for its factory, but if the road leading to it is underwater, it won't be doing much business or moving much product.

To help investors understand the preparedness or lack thereof, of the countries they operate in or depend on B and E.

F has just released a climate adaptation Preparedness framework and country scorecard.

In our view, the outlook for significantly higher public spending is weak.

Budgets will likely edge upward as a disasters mount, but don't expect governments or the UN process to deliver the trillions required.

As a case in point, the parties to the Paris Agreement haven't even been able to agree on what the key goals of its global goal on adaptation actually are.

That said, some green shoots are emerging.

City level spending on nature based solutions has reached a cumulative total of forty eight billion dollars by our account, and these local interventions often achieved positive returns.

A more significant step up in government action could happen when rating agencies fully factor physical climate and nature risks into sovereign credit ratings, or when capital markets clearly treat climate resilience as a comparative economic advantage.

Perhaps more important than directly funding adaptation activities, however, is government's role in catalyzing private finance.

To date, their efforts have centered on soft leaders like disclosure of requirements.

What's missing are hard, investible mechanisms akin to those in mitigation that provide attractive risk adjusted returns to mobilize investment from the private sector corporations quantifying risk but missing the forest for the trees.

Corporations disclosed only about four billion dollars a year in adaptation spending.

While some spending is likely buried in wider budgets, it's unlikely to be orders of magnitude more.

Our observation is that companies are thinking about climate risk, but not yet spending much on reducing it.

The alphabet soup of climate regulations has spurred a flurry of physical risk analyses, but few real economy firms are moving from risk assessment to significant action.

In fiscal year twenty twenty three, thirty seven percent of companies disclosed the potential impact of climate risks and opportunities on their businesses.

To do this, companies usually hire consultants to downscale the output of global climate models into site level forecasts of precipitation, wind, and temperature.

Estimates of the damage and disruption these hazards would cause to a typical structure of that address are then used to calculate the value at risk.

Such analyzes are a useful starting point, but they suffer major shortcomings.

The models are opaque results of a conflict between providers, and most importantly, they tend to focus narrowly on first order impacts in the built environment.

These are the direct, predictable risks inside of property's boundaries, such as an increase in flood risk.

These can seem like very manageable problems.

A larger repair budget can cover the risk of an occasionally flooded foyer.

However, that's like seeing only the tip of the iceberg.

The more serious threats are second order, knock on impacts that ripple through societies and economies, such as when a town floods repeatedly and falls into decline, or when wildfire devastates tourism and halves the market capitalization of in airline, which occurred recently in Hawaii.

Or when you thought warmer outlet pipes when nothing to worry about, and then your nuclear plant is shut down by jellyfish.

Given the lack of disclosure around adaptation activities, it's hard to know what companies are doing to adapt and make themselves more resilient, what good looks like, and what technologies and activities are being employed to reduce risk.

Another poorly understood dimension of risk is how changes to the environment will impact commodity markets, from disruptions to oil supply from hurricanes to a decline in the supply of vulnerable agricultural goods.

The physical impacts of climate change and nature loss will leave few industries unchanged.

What could start to change things.

A better understanding of the risks can help to mobilize more corporate capital, particularly if insurance is repriced and credit ratings revised.

But risks are never truly knowable, and fear alone is an incomplete motivator for investment.

To scale, adaptation also needs to become an opportunity.

Signs of this This are emerging in the agricultural sector.

The benefits of resilience are already a major motivator for producers.

US landowners have converted over four million hectares of degraded pasture to regenerative farming, improving soil health, sequestering carbon, and stabilizing yields in volatile weather.

In California, wildfire liability has driven utilities to commit billions to undergrounding transmission lines and help utility PG and E to achieve a credit rating upgrade.

The Bloomberg Intelligence Prepare and repair tracker, which follows one hundred and ten firms in construction, building supplies, heating and cooling, and other adaptive industries, has outperformed the S and P five hundred over the past five years.

More broadly, global warming is expected to drive trillions in incremental demand for resilience related goods and services.

Uncovering these opportunities will be another focus of our work on this topic.

Financials curious and waiting to act.

Financial insta institutions have invested even less in adaptation than corporates under one billion dollars in twenty twenty three, although as with corporates, some activity is likely unreported.

However, stakeholders have told BNAF they are eager to invest when business models become profitable, mostly motivated by evolving regulations.

Many institutional investors are also employing physical risk analysis to assess the exposure of assets in their portfolio.

For some, this is just a box sticking exercise.

Others use it to nudge exposed companies in their portfolio.

The more advanced use it as a negative screen in due diligence, while the most sophisticated also apply it as a positive screen to identify assets well positioned for a warmer future.

A few firms are already developing opportunity based investment THECES, such as a real estate company resilience investments, which expect property price growth from internal migration towards climate havens in the US Great Lakes and Northeast.

The opportunity to increase the resilience and natural capital value of farmland has also helped it achieve fourfold growth as an asset class.

Banks are also being pressed by regulators and supervisors to evaluate climate risks, though no binding global standards exist yet, mostly due to US resistance.

With balance sheets heavily exposed to real estate, lenders are especially at risk from cascading climate impacts.

Leading banks now run quantitative analysis of climate risks across their mortgage portfolios, and some are beginning to act on the findings, such as through climate risk adjusted loan pricing, but progress is uneven and many banks remain immature in their approach keing finances, though are watching for the emergence of new business models and shifts in demand that create lending opportunities.

Insurers are heavily exposed to physical risks, but also the most sophisticated in understanding them.

For decades, insurers have refined tools to estimate climate damages, adjust pricing, and manage exposure.

Yet as risk aggregators and transferrrs, they will not fund adaptation directly.

Instead, their critical role is to send the price signals that motivate others to invest.

Rising premiums or the withdrawal of coverage altogether are already reshaping markets and will increasingly help make the business case for resilience.

The challenges ensuring that pricing engines reward adaptive actions with lower premiums and the restoration of coverage.

At present, the global insurance protection gap is around sixty percent and widening as more regions become uninsurable.

Scaling up capital flows from financial institutions will mostly depend on the incentives for governments and corporates described above working.

More exotic financial innovations are also being proposed.

Catastrophe bonds could hypothetically be modified to help finance preventative infrastructure resilience.

Bonds that explicitly monetize avoided losses from adaptation projects have also been proposed, and adaptation linked debt swaps, such as Barbados's twenty twenty two deal restructure sovereign debt and ear mark savings for funding resilience projects.

None of these instruments and magic bullets.

They remain complex, untested at scale, and reliant on a clearer articulation of risks and benefits, but they signal how adaptation and resilience could become new asset classes, a topic we will follow closely.

Individuals are ultimately the group that will shoulder the final burden of both the physical and financial impacts of climate change and nature loss.

Estimates of how much individuals are currently spending aren't available, but sales figures of key appliances show that individuals are already deploying capital to adapt.

Backup generator sales have exceeded macroeconomic growth in the US and spike following cold snaps and hurricanes.

Studies show that in China, air conditioning sales increase sixteen percent for every additional thirty degree see day, a trend that is set to accelerate as air conditioning a LI electricity demand nearly doubles by twenty fifty in BNF's economic transition scenario.

These examples demonstrate how climate change is likely to shift the sands on demand for many consumer goods.

Individuals are also heavily exposed to the price signals coming from insurance.

In the US, homeowners insurance has increased eight point seven percent faster than inflation in most states since twenty eighteen.

Bloomberg Intelligence estimates that this has caused a four point six percent average reduction in non discretionary spending, particularly in low cost of living high insurance cost states such as Oklahoma and Texas.

Rising insurance costs in places like Florida and California are also providing a clear signal of the rising risks to real estate.

This is already driving adaptive responses, such as homeowners fortifying roofs against hurricanes under Alabama's IBHS program, or retrofitting properties in wildfire prone areas to meet wildfire prepared home standards.

Spending by individuals and adaptation would almost certainly keep rising and may prove the moist organic source of the missing trillions.

Much of it will be hard to track since it is fragmented and difficult to attribute.

Moreover, while household's propensity to respond is a sign that investment will eventually scale, such actions are likely to happen only after they have suffered damages.

As such, it underscores the tragedy of climate change and nature loss.

It is families who will shoulder the costs where they can, while the poorest are left behind.

Realizing the imperative.

There are growing signs that momentum is building in adaptation and that investment could begin to scale the current state of play and emerging green shoots suggests that this could happen through five main channels.

The first is a more accurate pricing of risk, for example, clearer valuation of physical climate impacts from more comprehensive risk analysis and recognition of second order effects to insurance pricing and eventually corporate and sovereign credit ratings.

The second are the financial capture of benefits, for example via instruments that monetize resilience outcomes such as insurance premium reductions, municipal nature based projects, and resilience bonds.

The third is arbitrage, for example, capital reallocating away from poorly priced, high risk assets and towards those positioned to outperform, such as regenerative agriculture or real estate in climate havens.

The fourth is demand shifts, for example, households and businesses increasing spending on resilience goods.

And services, from air conditioning to early warning systems.

And fifth is liability and regulation, for example, government actions that set resilience standards and create financial accountability via building codes or liability for failures and disasters.

Of course, black swan events or Sharper shocks could accelerate these dynamics.

A reinsurer collapse or a mortgage crisis triggered by climate driven property devaluation could reprice risk across markets and force more sweeping interventions.

If physical risks continue to be mispriced, invisible exposures concentrated on insurer and bank balance sheets could eventually trigger instability.

Whatever the trigger, the business case for adaptation is coming into focus.

As it does.

BNF will track the bell weathers that matter at spotlight the models that work, helping clients navigate the adaptation imperative and turn climate and nature risk into opportunity.

Today's episode of Switched On was produced by Cam Gray with production assistance from Kamala Shelling.

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