Context

Australia is highly exposed to physical climate impacts, including acute shocks from floods, bushfires, and storms, as well as chronic hazards like sea-level rise and heatwaves. According to the Australian Prudential Regulation Authority (APRA), rising insurance costs have already priced one in seven Australian homes out of coverage. This figure is projected to rise to one in four homes, and over 40 per cent of households in rural areas, by 2050. Furthermore, the National Climate Risk Assessment (NCRA) estimates that over 1.5 million people could be living in coastal areas at high risk of flooding by that time.

The economic and financial costs are substantial. Natural disasters currently cost the Australian economy approximately $38 billion annually, a figure projected to reach at least $73 billion by 2060. Physical climate risks could reduce Australia’s Gross Domestic Product (GDP) by 15 per cent by 2050. Additionally, Treasury’s 2023 Intergenerational Report estimates that higher temperatures alone could reduce cumulative economic output by $135–423 billion by 2063 through impacts on labour productivity. Unmanaged physical risks threaten to reduce asset values and increase credit, liquidity, and operational risks across the financial system.

Strategic investment in adaptation and resilience is critical for long-term stability. The Insurance Council of Australia (ICA) finds that every $1 invested in resilience can deliver approximately $9.60 in avoided losses. Despite high rates of return, investment remains constrained by barriers such as inconsistent definitions and the undervaluation of avoided losses. Expanding the Australian Sustainable Finance Taxonomy to explicitly include adaptation and resilience aims to address these barriers by providing a shared, decision-grade framework for identifying and financing credible activities.

The role of the Australian Sustainable Finance Taxonomy

Expanding the taxonomy provides the market infrastructure necessary to mobilise investment at scale. It creates a shared language for identifying, defining, and classifying adaptation activities so actors across the system can take coordinated action. By establishing clear and credible criteria, the taxonomy supports capital allocation decisions and makes resilience investment visible, particularly when it is embedded within broader capital expenditure or routine asset renewals.

A taxonomy enables consistency and comparability across finance, insurance, and industry, which improves efficiency and supports co-investment. It also supports the development of financial products, such as sustainable lending, labelled bonds, and concessional finance. Furthermore, it allows for investment tracking and reporting across institutions and regions, improving visibility and supporting the recognition of resilience actions. This framework does not replace existing risk assessments or technical standards but builds on them to consistently identify measures that make a substantial contribution to resilience.

Adaptation and resilience taxonomy use case analysis

For banks, the taxonomy provides consistent criteria to identify qualifying resilience measures within mainstream lending, such as mortgages and infrastructure projects. As of June 2026, Australian authorised deposit-taking institutions (ADIs) held approximately $2.6 trillion in residential mortgage credit. Identifying physical risk exposure alone is insufficient; banks require a consistent basis for tracking adaptation finance. The taxonomy allows banks to integrate resilience into sustainable finance frameworks and align lending with public and concessional financing.

Non-financial corporates can use the taxonomy to integrate resilience into business strategies and investment priorities. Currently, disclosure of adaptation investment remains limited among ASX-listed entities. The taxonomy helps companies identify qualifying components of broader capital expenditure (CapEx) and operational expenditure (OpEx), making proactive investment visible to lenders, investors, and insurers. This visibility can support access to finance and strengthen business continuity and asset performance.

In the insurance sector, insurers received more than 409,000 claims between 2022 and 2026, at a total insured cost of $11.3 billion. APRA’s 2026 Insurance Climate Vulnerability Assessment (ICVA) found that home insurance premiums increased by an average of 7.2 per cent annually between 2010 and 2025. The taxonomy supports underwriting by enabling the consistent recognition of resilience measures alongside evidence of risk reduction, which can help maintain insurance availability and affordability.

Institutional investors manage $3.2 trillion in superannuation funds, and recent analysis suggests investment returns could fall by up to 46 per cent by 2050 due to physical climate risks. The taxonomy helps investors protect long-term value by identifying credible adaptation opportunities at both asset and systems levels. For government entities, the taxonomy supports sovereign financing and coordinates public-private investment, helping to reduce the growing fiscal burden of disaster recovery, which currently costs the Australian Government approximately $1.6 billion annually.