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Speaker 1: This is Tom rowlans Reese and you're listening to Switched On,

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Speaker 1: the podcast brought to you by BNF. We often think

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Speaker 1: about climate action in terms of cutting emissions, but adaptation

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Speaker 1: is also an important part of the story for investors, businesses,

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Speaker 1: and governments. Building resilience is becoming central to long term strategy.

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Speaker 1: It's about understanding risk, responding to change, and finding opportunity

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Speaker 1: in how the world around us evolves. On today's show,

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Speaker 1: we're going to bring you something different from our usual

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Speaker 1: BNF analyst interview. Coby bavna Agri, BNF's head of strategy

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Speaker 1: and Switched On host, is going to read his recent

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Speaker 1: note titled Adaptation and Resilience the New Investment Imperative. In it,

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Speaker 1: it explores how climate adaptation is shaping decisions across finance,

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Speaker 1: policy and industry, and what building resilience means for future economies.

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Speaker 1: BNAF clients can find this note, along with other climate

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Speaker 1: and adaptation research, by heading to BNF go on the

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Speaker 1: Bloomberg Terminal, or visiting BNF dot com to learn more

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Speaker 1: about how BNF approaches strategy. Research on the energy transition,

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Speaker 1: including developments in commodity markets, sector trends, and the technology

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Speaker 1: shaping the future. Find more information at bienf dot com.

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Speaker 1: So let's see how adaptation is moving from concept to

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Speaker 1: action with.

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Speaker 2: Cobalt adaptation and resilience the new investment imperative. Of all

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Speaker 2: the things a power system operator, worries about jellyfish are

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Speaker 2: probably not one of them. But in August, a swarm

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Speaker 2: of barrel jellyfish were sucked into the cooling system of

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Speaker 2: Western Europe's largest nuclear power station, shutting down the plant

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Speaker 2: for ten days. A marine heat wave had triggered a

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Speaker 2: bloom of the jellyfish, who today have far fewer natural

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Speaker 2: predators to keep their numbers in check. This curious example

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Speaker 2: demonstrates how exposed human systems are to the physical impacts

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Speaker 2: of climate change and nature loss, which are mounting rapidly.

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Speaker 2: Climate damages from fire, flood, and storms cost the world's

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Speaker 2: economies one point four trillion dollars in twenty twenty four,

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Speaker 2: up from one hundred and fifty billion in the year

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Speaker 2: two thousand. In twenty twenty four alone, the damage bill

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Speaker 2: in the US hit nine hundred and twenty four billion dollars,

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Speaker 2: which equates to three point five percent of its national GDP,

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Speaker 2: with virtually every year breaking the temperature record, These financial

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Speaker 2: impacts are only going to get worse. How much worse?

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Speaker 2: In its latest update, the Network for Greening the Financial

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Speaker 2: System estimated that GDP would be reduced by fifteen percent

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Speaker 2: in twenty fifty under current policies, using a top down methodology,

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Speaker 2: which falls within the range of other sources which show

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Speaker 2: a one to nineteen percent reduction in GDP by twenty fifty.

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Speaker 2: While these estimation techniques face some criticism, bottom up methodologies

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Speaker 2: that usually produce much lower totals are intuitively under estimates.

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Speaker 2: How can they anticipate the many unexpected impacts of warming

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Speaker 2: Like the jellyfish. Even if you wish to be optimistic

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Speaker 2: and plan for the world hitting net zero by twenty fifty,

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Speaker 2: I'm afraid the impact is still stark a seven percent

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Speaker 2: GDP impairment by twenty fifty according to the NNGFS. None

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Speaker 2: of these estimates include the impacts of nature loss, which

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Speaker 2: would likely add trillions more to the damage bill. Shielding

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Speaker 2: the economy, businesses, and people from these damages is the

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Speaker 2: goal of climate adaptation. Adapting to climate change will require

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Speaker 2: hundreds of billions and possibly trillions of dollars of investment

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Speaker 2: in everything from sea walls to seed science. The best

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Speaker 2: estimate is that we are currently spending only about sixty

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Speaker 2: five billion dollars per year. The mounting damager's bill we

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Speaker 2: are already facing suggests that scaling this investment needs to

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Speaker 2: be an imperative now. The difficulty is that climate risk

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Speaker 2: is mispriced, the market signals for investing in adaptation are absent, underdeveloped,

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Speaker 2: or weak. Political focus on adaptation has also always lagged mitigation,

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Speaker 2: in part because focusing on adaptation can feel like an

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Speaker 2: admission of defa. But as the numbers I mentioned before show,

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Speaker 2: climate damages are already here and the need for adaptation

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Speaker 2: is not about giving up on reducing emissions. It is

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Speaker 2: prudent risk management. The key question is how do we

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Speaker 2: scale the necessary investment. The answer is by turning risk

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Speaker 2: into opportunity. Who and what will make the money flow.

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Speaker 2: Investment in adaptation currently comes from four main sources. Governments, corporations,

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Speaker 2: financials and individuals. Will unpack where each of them are

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Speaker 2: on the adaptation journey. Governments slowly getting into gear, but

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Speaker 2: don't expect trillions. Public sources like governments and development finance

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Speaker 2: bodies have so far contributed the lion's share of funding

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Speaker 2: for adaptation, accounting for ninety percent of the total, or

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Speaker 2: about fifty eight billion dollars in twenty twenty three. Yet

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Speaker 2: government's focus so far has mostly been on planning rather

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Speaker 2: than implementation. According to the UN, eighty seven percent of

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Speaker 2: govern have produced a national adaptation plan or some form

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Speaker 2: of planning instrument, as encouraged by the Paris Agreement. Leading

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Speaker 2: countries such as Canada and Singapore have gone further, legislating

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Speaker 2: national adaptation strategies and dedicating recurring budgets. However, many adaptation

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Speaker 2: plans are flimsy or outdated. This uneven progress should worry

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Speaker 2: business and investors because a country's preparedness for climate impacts

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Speaker 2: will shape the probability of loss for the assets, companies,

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Speaker 2: and societies located in it. Many of the financial impacts

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Speaker 2: of climate change are beyond any single entity sphere of control.

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Speaker 2: A firm could build the best flood defense in the

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Speaker 2: world for its factory, but if the road leading to

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Speaker 2: it is underwater, it won't be doing much business or

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Speaker 2: moving much product. To help investors understand the preparedness or

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Speaker 2: lack thereof, of the countries they operate in or depend

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Speaker 2: on B and E. F has just released a climate

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Speaker 2: adaptation Preparedness framework and country scorecard. In our view, the

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Speaker 2: outlook for significantly higher public spending is weak. Budgets will

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Speaker 2: likely edge upward as a disasters mount, but don't expect

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Speaker 2: governments or the UN process to deliver the trillions required.

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Speaker 2: As a case in point, the parties to the Paris

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Speaker 2: Agreement haven't even been able to agree on what the

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Speaker 2: key goals of its global goal on adaptation actually are.

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Speaker 2: That said, some green shoots are emerging. City level spending

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Speaker 2: on nature based solutions has reached a cumulative total of

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Speaker 2: forty eight billion dollars by our account, and these local

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Speaker 2: interventions often achieved positive returns. A more significant step up

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Speaker 2: in government action could happen when rating agencies fully factor

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Speaker 2: physical climate and nature risks into sovereign credit ratings, or

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Speaker 2: when capital markets clearly treat climate resilience as a comparative

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Speaker 2: economic advantage. Perhaps more important than directly funding adaptation activities, however,

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Speaker 2: is government's role in catalyzing private finance. To date, their

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Speaker 2: efforts have centered on soft leaders like disclosure of requirements.

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Speaker 2: What's missing are hard, investible mechanisms akin to those in

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Speaker 2: mitigation that provide attractive risk adjusted returns to mobilize investment

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Speaker 2: from the private sector corporations quantifying risk but missing the

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Speaker 2: forest for the trees. Corporations disclosed only about four billion

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Speaker 2: dollars a year in adaptation spending. While some spending is

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Speaker 2: likely buried in wider budgets, it's unlikely to be orders

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Speaker 2: of magnitude more. Our observation is that companies are thinking

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Speaker 2: about climate risk, but not yet spending much on reducing it.

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Speaker 2: The alphabet soup of climate regulations has spurred a flurry

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Speaker 2: of physical risk analyses, but few real economy firms are

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Speaker 2: moving from risk assessment to significant action. In fiscal year

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Speaker 2: twenty twenty three, thirty seven percent of companies disclosed the

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Speaker 2: potential impact of climate risks and opportunities on their businesses.

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Speaker 2: To do this, companies usually hire consultants to downscale the

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Speaker 2: output of global climate models into site level forecasts of precipitation, wind,

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Speaker 2: and temperature. Estimates of the damage and disruption these hazards

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Speaker 2: would cause to a typical structure of that address are

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Speaker 2: then used to calculate the value at risk. Such analyzes

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Speaker 2: are a useful starting point, but they suffer major shortcomings.

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Speaker 2: The models are opaque results of a conflict between providers,

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Speaker 2: and most importantly, they tend to focus narrowly on first

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Speaker 2: order impacts in the built environment. These are the direct,

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Speaker 2: predictable risks inside of property's boundaries, such as an increase

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Speaker 2: in flood risk. These can seem like very manageable problems.

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Speaker 2: A larger repair budget can cover the risk of an

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Speaker 2: occasionally flooded foyer. However, that's like seeing only the tip

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Speaker 2: of the iceberg. The more serious threats are second order,

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Speaker 2: knock on impacts that ripple through societies and economies, such

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Speaker 2: as when a town floods repeatedly and falls into decline,

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Speaker 2: or when wildfire devastates tourism and halves the market capitalization

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Speaker 2: of in airline, which occurred recently in Hawaii. Or when

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Speaker 2: you thought warmer outlet pipes when nothing to worry about,

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Speaker 2: and then your nuclear plant is shut down by jellyfish.

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Speaker 2: Given the lack of disclosure around adaptation activities, it's hard

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Speaker 2: to know what companies are doing to adapt and make

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Speaker 2: themselves more resilient, what good looks like, and what technologies

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Speaker 2: and activities are being employed to reduce risk. Another poorly

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Speaker 2: understood dimension of risk is how changes to the environment

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Speaker 2: will impact commodity markets, from disruptions to oil supply from

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Speaker 2: hurricanes to a decline in the supply of vulnerable agricultural goods.

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Speaker 2: The physical impacts of climate change and nature loss will

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Speaker 2: leave few industries unchanged. What could start to change things.

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Speaker 2: A better understanding of the risks can help to mobilize

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Speaker 2: more corporate capital, particularly if insurance is repriced and credit

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Speaker 2: ratings revised. But risks are never truly knowable, and fear

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Speaker 2: alone is an incomplete motivator for investment. To scale, adaptation

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Speaker 2: also needs to become an opportunity. Signs of this This

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Speaker 2: are emerging in the agricultural sector. The benefits of resilience

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Speaker 2: are already a major motivator for producers. US landowners have

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Speaker 2: converted over four million hectares of degraded pasture to regenerative farming,

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Speaker 2: improving soil health, sequestering carbon, and stabilizing yields in volatile weather.

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Speaker 2: In California, wildfire liability has driven utilities to commit billions

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Speaker 2: to undergrounding transmission lines and help utility PG and E

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Speaker 2: to achieve a credit rating upgrade. The Bloomberg Intelligence Prepare

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Speaker 2: and repair tracker, which follows one hundred and ten firms

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Speaker 2: in construction, building supplies, heating and cooling, and other adaptive industries,

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Speaker 2: has outperformed the S and P five hundred over the

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Speaker 2: past five years. More broadly, global warming is expected to

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Speaker 2: drive trillions in incremental demand for resilience related goods and services.

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Speaker 2: Uncovering these opportunities will be another focus of our work

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Speaker 2: on this topic. Financials curious and waiting to act. Financial

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Speaker 2: insta institutions have invested even less in adaptation than corporates

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Speaker 2: under one billion dollars in twenty twenty three, although as

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Speaker 2: with corporates, some activity is likely unreported. However, stakeholders have

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Speaker 2: told BNAF they are eager to invest when business models

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Speaker 2: become profitable, mostly motivated by evolving regulations. Many institutional investors

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Speaker 2: are also employing physical risk analysis to assess the exposure

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Speaker 2: of assets in their portfolio. For some, this is just

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Speaker 2: a box sticking exercise. Others use it to nudge exposed

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Speaker 2: companies in their portfolio. The more advanced use it as

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Speaker 2: a negative screen in due diligence, while the most sophisticated

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Speaker 2: also apply it as a positive screen to identify assets

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Speaker 2: well positioned for a warmer future. A few firms are

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Speaker 2: already developing opportunity based investment THECES, such as a real

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Speaker 2: estate company resilience investments, which expect property price growth from

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Speaker 2: internal migration towards climate havens in the US Great Lakes

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Speaker 2: and Northeast. The opportunity to increase the resilience and natural

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Speaker 2: capital value of farmland has also helped it achieve fourfold

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Speaker 2: growth as an asset class. Banks are also being pressed

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Speaker 2: by regulators and supervisors to evaluate climate risks, though no

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Speaker 2: binding global standards exist yet, mostly due to US resistance.

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Speaker 2: With balance sheets heavily exposed to real estate, lenders are

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Speaker 2: especially at risk from cascading climate impacts. Leading banks now

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Speaker 2: run quantitative analysis of climate risks across their mortgage portfolios,

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Speaker 2: and some are beginning to act on the findings, such

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Speaker 2: as through climate risk adjusted loan pricing, but progress is

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Speaker 2: uneven and many banks remain immature in their approach keing finances,

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Speaker 2: though are watching for the emergence of new business models

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Speaker 2: and shifts in demand that create lending opportunities. Insurers are

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Speaker 2: heavily exposed to physical risks, but also the most sophisticated

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Speaker 2: in understanding them. For decades, insurers have refined tools to

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Speaker 2: estimate climate damages, adjust pricing, and manage exposure. Yet as

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Speaker 2: risk aggregators and transferrrs, they will not fund adaptation directly. Instead,

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Speaker 2: their critical role is to send the price signals that

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Speaker 2: motivate others to invest. Rising premiums or the withdrawal of

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Speaker 2: coverage altogether are already reshaping markets and will increasingly help

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Speaker 2: make the business case for resilience. The challenges ensuring that

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Speaker 2: pricing engines reward adaptive actions with lower premiums and the

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Speaker 2: restoration of coverage. At present, the global insurance protection gap

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Speaker 2: is around sixty percent and widening as more regions become uninsurable.

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Speaker 2: Scaling up capital flows from financial institutions will mostly depend

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Speaker 2: on the incentives for governments and corporates described above working.

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Speaker 2: More exotic financial innovations are also being proposed. Catastrophe bonds

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Speaker 2: could hypothetically be modified to help finance preventative infrastructure resilience.

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Speaker 2: Bonds that explicitly monetize avoided losses from adaptation projects have

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Speaker 2: also been proposed, and adaptation linked debt swaps, such as

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Speaker 2: Barbados's twenty twenty two deal restructure sovereign debt and ear

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Speaker 2: mark savings for funding resilience projects. None of these instruments

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Speaker 2: and magic bullets. They remain complex, untested at scale, and

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Speaker 2: reliant on a clearer articulation of risks and benefits, but

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Speaker 2: they signal how adaptation and resilience could become new asset classes,

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Speaker 2: a topic we will follow closely. Individuals are ultimately the

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Speaker 2: group that will shoulder the final burden of both the

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Speaker 2: physical and financial impacts of climate change and nature loss.

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Speaker 2: Estimates of how much individuals are currently spending aren't available,

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Speaker 2: but sales figures of key appliances show that individuals are

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Speaker 2: already deploying capital to adapt. Backup generator sales have exceeded

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Speaker 2: macroeconomic growth in the US and spike following cold snaps

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Speaker 2: and hurricanes. Studies show that in China, air conditioning sales

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Speaker 2: increase sixteen percent for every additional thirty degree see day,

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Speaker 2: a trend that is set to accelerate as air conditioning

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Speaker 2: a LI electricity demand nearly doubles by twenty fifty in

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Speaker 2: BNF's economic transition scenario. These examples demonstrate how climate change

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Speaker 2: is likely to shift the sands on demand for many

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Speaker 2: consumer goods. Individuals are also heavily exposed to the price

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Speaker 2: signals coming from insurance. In the US, homeowners insurance has

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Speaker 2: increased eight point seven percent faster than inflation in most

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Speaker 2: states since twenty eighteen. Bloomberg Intelligence estimates that this has

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Speaker 2: caused a four point six percent average reduction in non

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Speaker 2: discretionary spending, particularly in low cost of living high insurance

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Speaker 2: cost states such as Oklahoma and Texas. Rising insurance costs

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Speaker 2: in places like Florida and California are also providing a

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Speaker 2: clear signal of the rising risks to real estate. This

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Speaker 2: is already driving adaptive responses, such as homeowners fortifying roofs

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Speaker 2: against hurricanes under Alabama's IBHS program, or retrofitting properties in

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Speaker 2: wildfire prone areas to meet wildfire prepared home standards. Spending

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Speaker 2: by individuals and adaptation would almost certainly keep rising and

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Speaker 2: may prove the moist organic source of the missing trillions.

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Speaker 2: Much of it will be hard to track since it

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Speaker 2: is fragmented and difficult to attribute. Moreover, while household's propensity

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Speaker 2: to respond is a sign that investment will eventually scale,

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Speaker 2: such actions are likely to happen only after they have

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Speaker 2: suffered damages. As such, it underscores the tragedy of climate

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Speaker 2: change and nature loss. It is families who will shoulder

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Speaker 2: the costs where they can, while the poorest are left behind.

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Speaker 2: Realizing the imperative. There are growing signs that momentum is

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Speaker 2: building in adaptation and that investment could begin to scale

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Speaker 2: the current state of play and emerging green shoots suggests

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Speaker 2: that this could happen through five main channels. The first

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Speaker 2: is a more accurate pricing of risk, for example, clearer

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Speaker 2: valuation of physical climate impacts from more comprehensive risk analysis

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Speaker 2: and recognition of second order effects to insurance pricing and

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Speaker 2: eventually corporate and sovereign credit ratings. The second are the

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Speaker 2: financial capture of benefits, for example via instruments that monetize

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Speaker 2: resilience outcomes such as insurance premium reductions, municipal nature based projects,

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Speaker 2: and resilience bonds. The third is arbitrage, for example, capital

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Speaker 2: reallocating away from poorly priced, high risk assets and towards

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Speaker 2: those positioned to outperform, such as regenerative agriculture or real

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Speaker 2: estate in climate havens. The fourth is demand shifts, for example,

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Speaker 2: households and businesses increasing spending on resilience goods. And services,

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Speaker 2: from air conditioning to early warning systems. And fifth is

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Speaker 2: liability and regulation, for example, government actions that set resilience

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Speaker 2: standards and create financial accountability via building codes or liability

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Speaker 2: for failures and disasters. Of course, black swan events or

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Speaker 2: Sharper shocks could accelerate these dynamics. A reinsurer collapse or

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Speaker 2: a mortgage crisis triggered by climate driven property devaluation could

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Speaker 2: reprice risk across markets and force more sweeping interventions. If

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Speaker 2: physical risks continue to be mispriced, invisible exposures concentrated on

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Speaker 2: insurer and bank balance sheets could eventually trigger instability. Whatever

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Speaker 2: the trigger, the business case for adaptation is coming into focus.

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Speaker 2: As it does. BNF will track the bell weathers that

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Speaker 2: matter at spotlight the models that work, helping clients navigate

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Speaker 2: the adaptation imperative and turn climate and nature risk into opportunity.

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Speaker 2: Today's episode of Switched On was produced by Cam Gray

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Speaker 2: with production assistance from Kamala Shelling. Bloomberg EF is a

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Speaker 2: service provided by Bloomberg Finance LP and its affiliates.

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Speaker 1: This recording does not constitute, or should it be construed,

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Speaker 1: as investment advice, investment recommendations, or a recommendation as to

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Speaker 1: an investment or other strategy.

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Speaker 2: Bloomberg ANNIAF should not be considered as information sufficient upon

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Speaker 2: which to base an investment decision. Neither Bloomberg Finance LP

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Speaker 2: nor any of its affiliates makes any representation or warranty

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Speaker 2: as to the accuracy or completeness of the information contained

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Speaker 2: in this recording, and any liability as a result of

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Speaker 2: this recording is expressly disclaimed