Climate adaptation may cost trillions. Is your portfolio ready?

Many large asset owners have begun to incorporate energy-transition risks and opportunities into their portfolio designs. Some have even developed proprietary frameworks for mitigating emissions. While this exposure may lead allocators to assume that the low-carbon transition comprises a larger investment opportunity set than climate adaptation and resilience to extreme weather events, there is compelling evidence to the contrary. In this paper, we explain why adaptation will likely cost much more than mitigation (and be even higher than current estimates), detail where spending will likely be highest, and suggest ways to invest in this growing opportunity.

A recent study projects that by 2050, spending on building resilience to damaging weather extremes will exceed transition spending sixfold, with US$38 trillion needed to tackle the effects of “committed” climate damages, compared to estimated mitigation costs of US$6 trillion.¹ (Committed damages refer to the effects of climate change that are “baked in” and impossible to mitigate in the medium term because warming GHG emissions remain in the atmosphere for extended periods.) Looking at some recent figures, in 2024, US investment in renewable energy, including grid hardening, storage, and efficiency, is US$300 billion.² In comparison, insured losses from hurricanes Helene and Milton, just two of the 11 named storms in the 2024 Atlantic hurricane season, are estimated at between US$35 and US$55 billion.³ Broadening the lens, the total insured cost of climate and weather disasters in the US in 2023 was US$95 billion, and 2024 is likely to exceed that.⁴

Trade-off between mitigation and adaptation

Empirical data aside, it is intuitive that adapting to  deadly and damaging extreme weather events or climate-related shifts will be more costly than transitioning to a lower-carbon economy. Innovation associated with transition spending scales over time, becoming more productive at a lower cost. Physical damages from climate change are not more efficient over time, but rather become more costly as inflation increases the value of affected assets, including infrastructure, real estate, and personal property.⁵

Our work with climate scientists at Woodwell Climate Research Center and the MIT Center for Sustainability Science and Strategy suggests that the already significant costs of adaptation will increase further if mitigation is delayed, underfunded, or ineffective. In other words, prolonged inaction to decarbonize the economy will exacerbate climate and extreme weather-driven damages, increase associated costs, and further the need for investment in adaptation and resilience. We believe this only strengthens the need, and investment case, for adaptation solutions longer term.

↓ Mitigation spend = ↑ Adaptation spend

Why the world will spend more on adaptation than mitigation 

Scientists and economists likely underestimate the need for investment in adaptation and resilience for two primary reasons: 

• Climate change is accelerating faster than anticipated. 
• Current data and models are unable to accurately assess interconnectivity of climate variables.

Climate change is accelerating

Climate change is outpacing scientific projections. The first 12-month period to exceed an average of 1.5°C was February 2023 – January 2024.⁶ This is significantly sooner than the IPCC’s recommended scenarios, which project warming to 1.5°C by 2035.⁷ In our view, this acceleration means that required spending on adaptation will likely exceed expectations in climate action plans that assume net-zero emissions by 2050: The world is simply not on a path to achieve that.

Current data and models underestimate the impacts

Compounding the acceleration problem, existing data and models likely underestimate the scope and complexity of interactions among climate variables — from socioeconomic dynamics like climate and natural-disaster-driven migration to “tipping points” like Amazon desertification, which has never occurred and only be determined via proxy data, making it difficult to estimate with precision. These factors are material to the scale of global climate damage, yet current models and projections cannot capture them — or discount the costs to adapt to them.

Where is the money going? 

Wellington’s Climate Research Team, along with our private climate investing team, estimate that the total addressable market (TAM) for annual spending in developed economies on just three areas: water-supply infrastructure, flood defenses, and wildfire suppression alone could range from US$205 – US$311 billion per year (Figure 1). 

Governments will constitute the majority of climate spending; the below examples highlight expected public spending on climate resilience: 

• Beginning on 1 January 2025, every company doing business in Italy must purchase insurance for protection from natural disasters such as flooding and landslides. This new law, which requires companies to buy coverage and insurers to provide it, is a response to the recent increase in severe climate events in Italy.⁹
• Research conducted by the US National Institute of Building Sciences found that, on average, every dollar spent by the US federal government on disaster resilience returns at least six dollars’ worth of benefits, including a reduction in future disaster losses.¹⁰
• The Asian Development Bank has estimated that under a high-emissions scenario, the frequency of typhoons and cyclones could double, resulting in flood losses that could account for half of the necessary adaptation funds in the region. 
• The US Department of Defense expects to spend US$5.1 billion in 2025 and has developed a Climate Adaptation Strategic Framework, detailing its intention to invest in resilience training, equipment, and infrastructure, and measures ensuring climate-secure military supply chains.¹¹

Broad investment opportunity set

The opportunity set for climate adaptation and extreme weather resilience is broad and multi-layered. For example, “water-supply infrastructure” is a general description of an adaptation need. Within that need, there is a wide range of investable areas, including pipes, pumps, water treatment, desalination, meters, irrigation, and engineering services. Other chronic and acute risks can be analyzed in that way.  Businesses from a range of sectors are innovating to provide essential solutions=. These examples illustrate the diverse and growing landscape of adaptation innovation, as well as a rapidly evolving market focused on resilience and sustainability:

Chronic risks and solutions

Heat, drought, water scarcity, and sea-level rise

India’s Ministry of Road Transport and Highways recently mandated that all new trucks manufactured after October 2025 must be equipped with air-conditioned cabins to improve conditions and safety for drivers. In its mandate, the Ministry acknowledged the key role truck drivers play in India’s transport sector, stating it is “unacceptable” for them to work in extreme heat conditions. 

Cities around the world, including Mexico City, Cape Town, Barcelona, Los Angeles, Miami, and many others, face severe chronic water-scarcity challenges. A few have come close to “day zero,” when the water supply runs completely dry. In the spring of 2024, the government of Mexico City had to bring in tanker trucks to supply the city’s 9.2 million residents with water. Urban water quality declined, and groundwater supplies were nearly depleted. A 2018 study by the city’s water agency estimated the long-term cost of addressing the municipality’s water shortage at US$13.5 billion.¹²

Investment opportunities

• Businesses providing HVAC products that protect against heat exhaustion during heat waves and air purification systems to combat respiratory issues during wildfires 
• Water technology companies providing “smart,” tech-enabled solutions that enhance water security, ensuring that communities can manage their water resources effectively 
• Consulting and engineering services that focus on enhancing resilience to climate variables globally, particularly through innovative water treatment facilities in developing countries

Acute risks and solutions

Hurricanes, wildfires, floods

Florida recently established a Hurricane Loss Mitigation Program that funds a range of solutions for homeowners and businesses that are “designed to increase a structure’s ability to withstand hurricane-force winds and flooding.”¹³  In 2022, Florida also passed the Home Hardening Sales Tax Exemption, which made consumer purchases of impact-resistant windows and doors exempt from tax for two years. Other cities are actively addressing flooding: Toronto recently introduced its Basement Flooding Protection Subsidy Program, which covers up to CAD$3,400 per home for the installation of flood protection devices like sump pumps or backwater valves, among others.¹⁴

Investment opportunities

• Innovators on fire safety products, including foams and fire retardants to prevent and combat wildfires 
• Insurance companies providing crucial data analytics for modeling climate risks, helping property and casualty insurers better understand and manage the impacts of severe weather
• Firms incorporating climate-related risks into insurance models, ensuring that they are prepared for the increasing frequency of storms, droughts, and flooding

Final thoughts

There is compelling evidence that climate and extreme weather resilience spending will exceed mitigation and transition spending. The rapidly growing demand for resilience presents significant opportunities for companies in developed and emerging markets, and across many sectors and industries. Businesses are already innovating to provide essential solutions, and new enterprises are emerging all the time. 

As a final note, to put climate and extreme weather adaptation in context with today’s hottest investment megatrend, artificial intelligence (AI), Bloomberg Intelligence estimates that six of the world’s largest tech companies plan to cumulatively spend US$200 billion on capital expenditures for AI infrastructure in the next two years alone. The stocks of AI companies have appreciated (in some cases, exponentially) on expectations for the growing global appetite for AI. In contrast, adaptation has so far not been considered an equivalent investment opportunity. But with global annual spending required for climate and extreme weather resilience projected to be at least twice and potentially more than three times that amount (Figure 2), we believe this opportunity is even more compelling.

¹Kotz, M., Levermann, A. & Wenz, L. “The economic commitment of climate change,” Nature 628, 551–557 (2024). | ²“Annual investment in clean energy by selected country and region, 2019 and 2024,” International Energy Association, 30 May 2024. | ³“Moody’s RMS event response estimates U.S. private market insured losses for hurricanes Helene and Milton combined to exceed US$35 billion,” Moody’s 14 October 2024. | ⁴“Billion-dollar weather and climate disasters: Overview,” National Centers for Environmental Information. | ⁵Acute climate events include hurricanes, wildfires, and floods; Chronic shifts include heat, drought, water scarcity, and sea-level rise. | ⁶“Warmest January on record, 12-month average over 1.5°C above preindustrial,” Copernicus Climate Change Service, 9 February 2024. | ⁷“Climate Change 2023: Synthesis Report Summary for Policymakers,” IPCC, March 2023. | ⁸“Effects of Climate Change on Health,” CDC, 29 February 2024. | ⁹Gautam Naik, “Italy to require companies buy insurance for climate risks,” Bloomberg, 3 December 2024. | ¹⁰National Climate Resilience Framework, The White House, September 2023. | ¹¹Department of Defense Climate Adaptation Plan: 2024- 2027, U.S. Department of Defense, 5 September 2024. | ¹²“Diagnóstico logros y desafíos” (Diagnosis of achievements and challenges), Sistema de Aguas de la Ciudad de México, 2018. | ¹³Hurricane Loss Mitigation Program, floridadisaster.org. | ¹⁴Basement Flooding Protection Subsidy Program, City of Toronto, Toronto.ca.