Introduction

This report provides a groundbreaking synthesis of the economic and fiscal risks arising from physical climate change and the case for investing in adaptation. It reviews nearly 300 studies and more than 6,000 unique estimates, combined with case studies from six countries: Bangladesh, Brazil, Kenya, Nigeria, Rwanda, and the UK. The document pays particular attention to the risks and opportunities facing emerging markets and developing countries, highlighting that proactive public policy paired with mitigation action is essential to safeguard national economic potential and individual livelihoods.

Macroeconomic and fiscal risks to economic stability and growth

The report demonstrates that climate impacts are already significant and growing rapidly. By 2050, climate change could reduce global GDP per capita by 8% (within a range of 3–15%) due to rises in local temperatures, sea-level rise, and some tipping points. Low- and lower-middle-income countries (LICs and LMICs) are projected to be disproportionately affected, facing a median reduction of 12% in GDP per capita, with some likely to face losses exceeding 20%. Alarmingly, the analysis suggests that people in LICs and LMICs are today already 4 to 12% poorer in terms of GDP per capita due to climatic changes since 1960.

Beyond market impacts on GDP, aggregate welfare damages—accounting for non-market losses such as health risks, cultural heritage loss, and biodiversity impacts—are projected to reach 14% of GDP-equivalent loss globally and 16% for LICs and LMICs by mid-century. Labour productivity is expected to decline by 0.6% globally, with a sharper 1.4% reduction in weather-exposed regions. Furthermore, total factor productivity growth could fall by 0.03 percentage points annually. Fiscal stability is also threatened, with global inflation projected to rise by 1.6 percentage points per year and sovereign credit ratings at risk. High-income countries face potential downgrades of two notches or more by 2050, increasing borrowing costs and creating a vicious cycle that hinders the ability to finance critical adaptation measures.

The case for adaptation investment

Adaptation investments yield substantial returns at the macroeconomic level through a ‘triple dividend’: preventing losses, stimulating economic activity, and providing social and environmental co-benefits. The evidence indicates median economic benefit–cost ratios (BCR) of approximately 4:1 globally and 5:1 for LICs and LMICs. Furthermore, the economic internal rate of return (EIRR) is about 25%. Many adaptation projects provide rapid benefits, with accumulated gains expected to exceed costs after approximately three years for the average project. Strategic investments bolster fiscal stability by maintaining government revenues and reducing future borrowing costs.

Case studies illustrate these benefits in practice. In Nigeria, integrated water resources management (IWRM) offers a fiscally sustainable path to reduce flood risk; in 2018, coastal degradation alone cost the country US$9.7 billion, equivalent to 2.4% of national GDP. In Brazil, nature-based solutions (NbS) drive agricultural productivity, with reduced deforestation increasing productivity by up to US$1 billion per year. Kenya’s experience with the Financing Locally-Led Climate Action (FLLoCA) programme has created over 85,000 jobs while prioritising community-level resilience. These examples suggest that the broader economic returns are typically higher than financial ones, as they capture benefits not priced by the market.

A call for action on adaptation investment

Strategic climate adaptation is an economic necessity requiring robust policy frameworks and long-term thinking. Embedding adaptation into design stages for infrastructure is significantly more cost-effective than retrofitting later. The report calls for Ministries of Finance to integrate physical climate risks into macroeconomic and budget projections. Institutional leadership is vital to overcome market failures that lead to underinvestment. For instance, the UK has developed national climate projections and mandated climate-related financial disclosures to improve transparency and risk pricing. Rwanda has successfully mainstreamed adaptation into national development plans and created the Rwanda Green Fund, which has tracked US$840 million in climate finance flows over five years. Bangladesh has established the Bangladesh Climate Development Partnership (BCDP) to address its climate finance deficit and ensure policy coherence.

Conclusion

The macroeconomic case for adaptation is clear and compelling. Physical climate risks have already increased, and without further action, some nations in Sub-Saharan Africa and Southeast Asia could face GDP losses exceeding 20% by 2050. Total factor productivity growth could be reduced by up to 0.3 percentage points per year, potentially driving long-term economic stagnation. Ministries of Finance must enhance their analytical capabilities to identify risks and develop long-term visions for well-adapted economies. By prioritising early no-regret adaptation options and ensuring resilience is built into all near-term infrastructure decisions, national-level actors can transform climate challenges into pathways for inclusive and resilient growth.