'Climate adaptation can't wait – but there is one big problem facing the scene'

The succinctly-titled late-2024 report ‘When Risks Become Reality’ from the research group World Weather Attribution sums up the state of play on the effects of climate change right now.

"This exceptional year of extreme weather shows how dangerous life has already become with 1.3°C of human-induced warming, and highlights the urgency of moving away from planet-heating fossil fuels as quickly as possible," reads the report’s introduction.

While efforts continue to reduce emissions, climate adaptation begins to draw more focus. 'Adaptation' refers broadly to the things we can do now to anticipate and adapt to the adverse climate events that have already been set in motion. This differs from mitigation, which seeks to reduce emissions, sequester carbon, or other efforts to prevent further degradation.

Whereas much impact VC focus has so far been on emissions reduction and mitigation, growing numbers of investors are now looking at adding adaptation to their impact portfolios.

Adaptation clearly offers great market opportunities

"We see more and more opportunities in adaptation, and unfortunately, when you look at the news, you understand why", Stéphane Villecroze of the new investment supergroup Demea Invest told Impact Loop earlier this month. "Of course mitigation has always been one of the drivers of our investments – in solutions for climate and environment – but adaptation clearly offers great market opportunities and growth perspectives."

Climate adaptation projects vary, from urban re-planning to ecosystem regeneration, resilient architecture and improved disaster early warning systems. An example of the latter is OroraTech’s satellite-based wildfire detection system, recently profiled in Impact Loop and also featured in our roundup of adaptation startups to watch.

Several impact stalwarts have backed OroraTech’s adaptation vision, including Belgium’s Korys, the investment arm of the Colruyt family, known for their supermarket empire, and Germany’s Ananda Impact Ventures. And as Demea's Villecroze puts it, the adaptation sector is increasingly on impact VCs’ radars. Other players, like Momentum VC, the climate-focused arm of Denmark’s Vækstfonden, and Pale Blue Dot, the Malmö-based climate tech fund, are also eyeing adaptation more closely.

Adaptation costs fall hardest on vulnerable developing countries

There is still a long way to go, however, with private capital representing just a small fraction of adaptation financing overall so far (adaptation being more typically within the purview of states and multilaterals). This is largely due to the nature of adaptation investments, which typically bring more risk to capital and offer a less clear roadmap to investor returns than other kinds of climate investments.

This issue is most acute in the Global South which offers less attractive conditions to an investor's eye than the North. Less well-developed infrastructure and capacities, political instability and low-quality data all add up to an environment most investors would rather steer clear of.

And yet, it is these countries that need adaptation investment the most.

"Adaptation costs fall hardest on vulnerable developing countries," wrote Achala Abeysinghe for the UK's International Institute for Environment and Development back in 2013.

For this reason, adaptation has been the focus of many of the recent COP climate conferences, where hundreds of billions of euros have been in theory pledged in annual adaptation funding, says Patricia Crifo, Professor of Economics at France's Ecole Polytechnique and co-author of an illuminating post on climate financing. But these funding agreements are only the very beginning of what is needed.

"Despite a significant increase in overall funding to combat climate change, efforts in favour of adaptation strategies remain clearly insufficient," Crifo told Impact Loop. "Representatives of the world's poorest countries are particularly critical of the agreement's 'lack of ambition.'"

Is 'blended finance' the answer?

While these arguments continue, a consensus has emerged that private finance must play a role in adaptation financing, says Crifo. But given all the risks, and the at best opaque pathways to future investor returns offered by many adaptation measures, can private capital ever be convinced to divert away from safer and more lucrative short-term investments?

One of the most promising avenues for private capital to enter adaptation is 'blended finance' – an approach combining government and philanthropic investment with VC capital, in theory reducing risks and bringing greater institutional oversight and management. It's something that a lot of investors we at Impact Loop have spoken with mentioned as something they see potential in.

Crifo says blended finance promises to attract "commercial capital to sectors and regions often viewed as high-risk or underfunded," but she warns that such arrangements require a lot of work and buy-in.

"The effectiveness of blended finance relies on well-structured frameworks, strong stakeholder partnerships, and a balanced alignment between financial returns and impact goals."

As with many other aspects of the world's race to head off the worst of climate change, there is still a lot of doubt as to whether adaptation efforts will get the funding needed to protect life and wellbeing. This is no more true than in the Global South.

A big part of that question is of course whether VC funds, impact or not, will step up to fund the long-term solutions required.