As the climate crisis intensifies, adaptation and resilience are emerging as the next frontier for private investors.
A new report by consulting giant Boston Consulting Group and Singapore state investor Temasek estimates the global climate adaptation spending could reach US$1.3 trillion annually by 2030.
While governments are expected to shoulder most of these funding needs, the study identified six promising segments for private investors: climate intelligence, climate-resilient building materials, flood defense infrastructure, climate-adapted agricultural inputs, water efficiency technologies and emergency medical products and services.
Private equity has been active in the climate intelligence market, which is expected to grow by 15 per cent yearly over the next five years, according to the report. The climate risk analytics segment is likely to grow the fastest, followed by the hazard warning space.
Driven by the mandating of International Sustainability Standards Board (ISSB)-aligned climate risk disclosures in markets like Hong Kong, Japan and Singapore, the study also said the number of reporting companies is expected to grow by at least threefold by 2028.
In the hazard warning segment, some companies are increasingly expanding into the earlier stages of climate and weather forecasting. For example, United States-based weather forecasting companies Tomorrow.io and Climavision have started to invest in sensors and instruments to collect their own climate data.
Steady acquisitions in recent years suggest strong exit potential for climate intelligence startups. Two examples of such deals cited are credit rating giants Moody’s and S&P’s purchases of US climate risk data firms Four Twenty Seven and The Climate Service in 2019 and 2022 respectively.
Meanwhile, the climate-resilient building materials sector is projected to expand by between 6 to 8 per cent per annum over the next five years. The report said that facade materials such as glass and fire-resistant materials companies are expected to drive this growth due to their increasing focus on building energy efficiency.
In terms of human-built flood defense solutions, which range from modular, deployable barriers to flood drains, demand has picked up in the last few years, driven by increasingly frequent extreme weather events, found the report. The segment is projected to grow between 7 to 10 per cent over the next five years.
As food security and affordability come into focus, the climate-adapted agricultural inputs market is likely to grow between 4 to 7 per cent each year. Mergers and acquisitions by major agricultural input players are expected, especially in the commercial seeds segment, driven by regulatory changes and customer acceptance of synthetic biology.
The urban and industrial water efficiency solutions market is expected to grow between 6 to 8 per cent annually in the next five years, with the leak-detection segment projected to expand the fastest, spurred by the integration of artificial intelligence and other technologies.
Driven by the growing need for medical relief in the aftermath of extreme weather events and associated health impacts from global warming, the emergency medical services sector is likely to expand between 8 to 10 per cent per annum in the next five years.
Private ambulance services have emerged as one of the most attractive investment opportunities in the space, with further growth and consolidation foreseen. The world’s two largest providers, India’s GMR and Denmark’s Falck, currently enjoy 20 to 30 per cent market share each, followed by regional players and smaller companies that own less than five ambulances each.
Overall, the report divided the adaptation investment opportunities into two archetypes: early-stage pure-play companies and large diversified players.
“These dynamics mirror the climate mitigation industry in its early days,” its authors stated. “Private investors approached that market by buying into large companies with legacy businesses that can provide cashflows as a way of investing in decarbonisation-focused companies. Similarly, many established players are re-aligning their strategies with climate adaptation and resilience as a growth vector.”
The writers also pointed out that the localised nature of the climate adaptation markets allow investors to enter at lower valuations before market expansion can be fully priced in, citing the examples of how global wildfire management solutions were mostly confined to North America until two years ago, where they started to see rapid expansion outside the US.
Growth potential of six investable climate adaptation and resilience-related subsectors over the next five years, according to BCG and Temasek. Image: Gabrielle See / Eco-Business
Rising institutional interest in adaptation
The launch of dedicated climate adaptation funds in recent years signal rising interest. Global investment platform Lightsmith Group, French asset manager Mirova and German government-initiated InsuResilience Investment Fund have all started backing companies in the space.
Temasek’s latest report is also the second to be released in the past week by a sovereign wealth fund that sizes up the private investment opportunities into climate adaptation.
Last Friday, Singapore’s GIC published an analysis estimating that escalating climate change impacts will quadruple revenues from adaptation solutions to US$4 trillion by 2050. Additionally, corresponding investment opportunities across public and private debt and equity are expected to rise from US$2 trillion to US$9 trillion in the same period.
GIC noted that “investors can build conviction in climate adaptation without needing to predict the precise climate scenario that will unfold between now and 2050,” given the minimal variation in the estimated value of climate adaptation investment opportunities across varying scenarios over the next 25 years.
Addressing the GIC’s recent report, Temasek’s managing director for sustainability Franziska Zimmermann told the audience at the launch event that while GIC’s analysis has set the stage at the macro level, Temasek’s own report aims to “take it one step deeper.”
“So far, when we think about climate adaptation and resilience, everybody’s thinking about infrastructure and big government projects, but nobody is thinking that private equity investors have a role to play. That’s what we wanted to explore (through the report),” she said.
