Over the past couple of years, and this year especially, it has been difficult to ignore the fact that we are seeing more extreme weather events here in the UK. From high levels of rainfall and flooding in Winter, to droughts and heatwaves in the Spring and Summer months, climate change is hitting us hard, and it is hitting us now.
Introduction
At the time of writing, we in the UK have recently seen two weeks of temperatures exceeding 30 degrees c. For some, these temperatures might seem normal or even low, but for us they present serious issues. We have seen schools and businesses close due to excessive indoor temperatures, trainlines disrupted by warping tracks, and even the UK Health Security Agency issue its first ever red warning for heat – which means a threat to life.
While these issues are indeed serious - and should not be ignored in the name of foolish optimism - we at Ethical Screening firmly believe that we can adapt to climate change and be better prepared for events like this in future. That said, we do not believe that this involves simply ‘getting used to it’; we need to adapt our buildings, improve the resilience of our infrastructure, and the alter the ways in which we go about our working and personal lives.
This will of course require a number of changes, which will bring a range of planning, technical, and social challenges. Older buildings will need to be retrofit in a manner that is sensitive to heritage preservation, and our infrastructure will need to be modernised without causing major disruption to logistics and the daily lives of travellers, to name but two.
The Role of Our Industry
We in the investment world might not have the expertise when it comes to modernising listed buildings and preventing thermal expansion of steel railway lines, but we do have a key role to play; we are in a position to help overcome one of the first major obstacles to climate adaptation – financing.
Just as the transition to Net Zero requires money, so does climate adaptation. In its 2024 Adaptation Gap Report, the UN Environment Programme’s Finance Initiative estimated an adaptation finance gap of approximately USD 187-359 billion per year, which the UNEP believes cannot be covered solely via public financing.
Direct financing of adaptation projects by banks and other lenders is a solution that initially comes to mind, but here at Ethical Screening we believe that smaller investors (including retail investors) should have the opportunity to direct capital towards such projects. Not only because this will help to raise the necessary funds, but because smaller investors should be given a right to help secure our common future.
A first port-of-call could well be the provision of cash ISAs where a certain percentage of money is earmarked for the financing of climate adaptation projects (as well as decarbonisation and renewable energy projects, etc.). This will allow some of the least sophisticated investors to have their savings used for this purpose, with banks and building societies doing the heavy lifting, and perhaps accepting some of the risk.
Cash ISAs do not, however, meet the needs of investors seeking above-inflation returns, which is where things start to get more complicated. Investing in companies that are actively involved in providing adaptation-related products and services via bonds and equities may be the natural next step, but the impact that this approach has is often indirect and limited. There are growing questions regarding the genuine impact that purchasing funds, equities, and bonds on the secondary market has, and it seems reasonable to suggest that this approach will not rapidly channel capital in a way that directly finances adaptation projects.
Direct financing is the obvious solution to this, but for most non-institutional investors this is often out of the question, given the risk. Holding a small number of bonds not listed on public markets may be an option for some wealthy investors with significant capacity for loss, for example, but this will not help to direct the vast quantity of capital needed, as indicated by the UNEP.
One solution to this could be in the form of re-packaging. Larger firms with significant financial resources could cover the outlay for an initial bond purchase or project finance deal, and then sell ‘parcels’ of this to smaller investors. This way, much needed adaptation projects can be directly financed, with retail investors playing a role in the process.
Conclusion
However we decide to go about it, the financing of adaptation projects and initiatives needs to happen, and preferably sooner rather than later. There will be challenges, as is to be expected, but they are not challenges we can afford to ignore.