As resistance to emissions mitigation intensifies and climate damages become harder to ignore, political attention is increasingly turning towards adaptation, long the parent pauvre of climate action. Unlike mitigation, adaptation can be presented as protection rather than transformation, without directly challenging fossil-fuel-dependent systems and livelihoods.
Adaptation was never absent from the investor climate agenda, but action developed earlier and more extensively around mitigation, through emissions targets, net-zero frameworks, engagement and policy advocacy. Resilience has only more recently become a focus area.
Understanding why adaptation has remained underinvested helps clarify the respective roles of companies, investors and policymakers in building resilience to physical climate risks.
Mitigation addresses climate change’s causes; adaptation responds to its consequences. Their economics are fundamentally different: mitigation faces a defining global externality problem, whereas adaptation delivers localised benefits.
The social benefits of mitigation are dispersed: those who abate capture only a fraction. The benefits of adaptation are far less diffuse. Adaptation can target specific assets and populations. The collective-action problem is therefore less immediate: a jurisdiction, community or company may undertake adaptation where it captures enough of the benefits, without seeking cooperation from others or worrying about free-riding. Adaptation can reduce expected asset destruction, operating and supply costs under stress, and disruption to activities and services, protecting lives, livelihoods and economic value. To that extent, adaptation is business as usual. Yet it remains underprovided.
An obvious first explanation is that physical risks and adaptation opportunities remain insufficiently understood. Hazard awareness may exist without adequate knowledge of exposures, expected impacts, available adaptation strategies and technologies, or their economics. Many firms, lenders and investors still lack adequate forward-looking physical-risk modelling, and even where hazards are identified, the chain to exposures, vulnerabilities and financial effects may be incomplete. Without that chain, needs and opportunities cannot be valued or prioritised, and economically attractive investments remain invisible. Better modelling, evidence on solutions and integration into financial decision-making can push actors closer to the frontier of what is economically feasible.
“Without coordination and workable arrangements for authorising and funding investment and for sharing benefits, suboptimal outcomes follow”
But information is not the only constraint. Resilience is rarely contained within the individual actor. Households, firms and public authorities may protect what they control and still remain exposed to risks immediately beyond those limits, or elsewhere in the systems on which they depend. Conversely, floodplain management, grid or water-system reinforcement, or adaptation across a logistics corridor can create resilience benefits across many actors and assets simultaneously.
The collective-action problem that complicates mitigation thus reappears in adaptation. Socially optimal measures may not be technically or economically required or feasible at the level of an individual actor. Without coordination and workable arrangements for authorising and funding investment and for sharing benefits, suboptimal outcomes follow. These may take the form of underinvestment, or adaptation at the wrong level, as when actors rationally invest in individual protection that duplicates expenditure, proves less effective than a coordinated solution, or increases risk for others.
For investors, the first implications are familiar. Physical risk must be analysed across portfolios. Where physical assets are directly controlled, adaptation can be integrated into capital budgeting and operational asset management. In other cases, stewardship can promote better physical-risk assessment and management, including through adaptation. At portfolio level, investors can also decide which residual risks are better retained, diversified or transferred.
But the bounded nature of adaptation benefits offers further opportunities to institutional investors with diversified exposures. Their portfolios may span multiple companies, properties, infrastructure assets, geographies and value chains that stand to gain from the same resilience investment. They may therefore help unlock resilience benefits beyond the reach of individual firms or operators. Coordination among investors and other stakeholders can extend that reach further.
The political turn towards adaptation offers investors opportunities to strengthen portfolios against physical risks and contribute to wider resilience
In practice, this may involve sharing information on physical risks and adaptation opportunities, aligning stakeholders, assembling funding, and developing contractual arrangements that allow resilience projects to proceed. Such coordination can also reveal what still prevents effective adaptation. Constraints may be technological or supply-side, reflect unresolved uncertainty, or arise from rules, mandates and planning arrangements that block viable solutions. Investors and other stakeholders can help identify such obstacles and support innovation, market development and institutional reform.
Beyond that lie harder appropriability limits. Where benefits cannot be sufficiently captured by those funding the investment, private coordination may no longer be enough. Public authority must then determine who can act, who pays and how benefits are shared, bringing adaptation squarely into the familiar, but at times treacherous, territory of public-private provision, with its perennial questions of lifetime risk allocation, cost recovery, affordability, rent extraction and contractual durability in the face of political risk.
Adaptation should be business as usual where risks are understood and the benefits of resilience can be captured. Business unusual begins where coordination is needed to aggregate benefits and funding: sometimes to push towards what is already feasible, sometimes to push the frontier itself through innovation, market development or institutional change.
The political turn towards adaptation offers investors opportunities to strengthen portfolios against physical risks and contribute to wider resilience. But if it becomes an excuse for weaker mitigation, physical risks will continue to rise across economies and portfolios. More subtly, the discourses that have normalised mitigation delay may now shape the politics of adaptation itself, making a narrow, domestically focused resilience agenda appear pragmatic. The turn towards adaptation need not be accompanied by a retreat from a fair transition towards resilient economies. But avoiding that outcome will require much greater care over whose resilience is being built.
Frédéric Ducoulombier is programme director, climate regulation and policies, at EDHEC Climate Institute
