The problem: Without adaptation, climate change will lead to capital flight

Climate change’s growing physical risks threaten investment stability in vulnerable regions, risking capital flight from high-risk areas. Losses from climate-related disasters reached $38 billion annually in Australia, projected to hit $73 billion by 2060. Insurance premiums are rising, with 12% of Australian households already facing affordability issues, often leading to uninsured properties. Banks and insurers are also increasingly reluctant to invest in high-risk areas. Without adaptation, this trend could destabilise both regional and national economies, with significant impacts on communities and government resources.

The need: Public and private investment in adaptation and resilience

Investing in climate adaptation is crucial for maintaining economic resilience. The public sector alone cannot meet the adaptation financing needs, estimated in the billions. Private investors, including Australia’s $3.9 trillion superannuation industry, can bridge this gap under appropriate conditions. The agriculture sector provides a notable case, where adaptation investments could boost yields significantly. Global adaptation funding needs remain high, with an annual shortfall of $194-266 billion worldwide. Superannuation funds and institutional investors have incentives to engage, as they hold long-term interests aligned with the economy’s overall resilience.

Current barriers

Four main barriers limit private adaptation investment: difficulty quantifying financial risks, resilience valuation challenges, inadequate cost-sharing mechanisms, and insufficient systemic resilience. Quantifying physical risks requires high-confidence data on climate hazards and assets’ vulnerabilities, which current models lack. Furthermore, existing valuation standards do not fully capture resilience benefits, leading investors to overlook adaptation’s economic advantages. Adaptation projects often benefit multiple stakeholders, complicating cost-sharing and diluting returns. Finally, systemic resilience is lacking; investments in single assets do not protect value if broader infrastructure is compromised.

Recommendations

The report outlines key actions for government and investors to overcome these barriers. Governments should prioritise a shared understanding of resilience, enacting a National Climate Risk Assessment (NCRA) and National Adaptation Plan (NAP) aligned with sector-specific resilience goals. This could include a resilience-focused Australian Sustainable Finance Taxonomy to guide investment criteria. Regulation reform should also support resilience in planning and investment, ensuring land use and building codes align with climate risks. Innovation in resilience financing, such as dedicated investment vehicles and public-private partnerships, is recommended. Finally, resilience initiatives should be showcased through case studies and pilot projects that demonstrate their value and scalability.

Conclusion

Accelerating adaptation investment presents a significant opportunity for long-term returns and economic stability. The report emphasises that effective collaboration between public and private sectors is essential to fund and implement resilience projects, enabling Australia’s economy to withstand climate risks. This shift requires updated regulatory frameworks, shared standards, and dedicated funding to support a resilient financial future.