investment funds adapt to warming world

Climate change adaptation is one of those subjects where it’s hard to strike the right tone. Some argue that the focus needs to remain squarely on the effort to reduce carbon emissions. Others counter that the fight to avoid catastrophic climate change is already all but lost, and we’d do better to get on with preparing ourselves.

But as that debate rumbles on, recent disasters have helped to focus fund managers’ minds on the case for investment in this field, as I explain below.

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climate adaptation

The funds proving that adapting to climate change doesn’t mean giving up

“It’s a gloomy thesis,” John Robinson said of the venture capital fund he launched this month.

Robinson’s Mazarine Climate fund is one of several new vehicles with strategies focused on a harsh reality that’s so far got relatively little attention in the investment fund world: the need to adapt to climate change impacts that are now certain to become increasingly severe.

So far, the vast majority of climate-themed funds have been focused on investments aimed at reducing carbon emissions. That’s hardly surprising. For one thing, the world still needs to invest far more in cutting carbon if it’s to avert the worst impacts of climate change. And a strategy that helps to prevent catastrophic warming intuitively sounds easier to market than one that merely seeks to manage it.

But Robinson said he had noticed “a not-so-subtle” shift of discussion in the investment community towards adaptation, as realisation dawned of the physical risks already presented by climate change — and the much more serious ones ensuing from the further warming ahead.

Mazarine is seeking to raise $25mn to invest in early-stage companies building digital technology that addresses climate change-related water risk. Target areas will range from companies whose systems can identify rain-related landslide threats, to others that help businesses manage the risks that floods and droughts pose to their global supply chains.

Robinson argued that Mazarine’s focus on climate change-related extreme weather risks differentiates it from other water-themed funds, which tend to have a wider mandate to invest in water supply and related technology.

“We have to deal with a world that’s going to be significantly disrupted because of our inability to decarbonise,” he said.

He’s right to point to an uptick of activity in the adaptation fund space. Invesco, one of the biggest US asset managers, is in the process of raising a sizeable fund that will invest in bonds whose proceeds will go, wholly or in part, towards climate adaptation. There’s a growing number of such bonds to choose from, as governments seek funds to increase their defences against extreme weather, according to research by Environmental Finance Data.

Invesco is hoping to raise $500mn for the new Climate Adaptation Action Fund by July. It had already reached $200mn in commitments by October from investors including pension funds and insurance companies. Part of the attraction was likely its innovative structure, under which 25 per cent of the investment will come from development finance institutions, who will take the first hit from any losses.

In a similar vein, private equity firm Lightsmith Group announced at November’s COP29 summit that it had secured grant funding from the Global Environment Facility and the US International Development Finance Corporation to support a new investment vehicle to finance companies supporting climate adaptation.

The “blended finance” approach is also central to another new climate adaptation fund being raised by Gawa Capital, a Madrid-based impact investment firm. Gawa has secured almost half of the €300mn it aims to raise for the fund, which is underpinned by €37mn in first-loss capital from the Green Climate Fund and the European Commission.

Gawa’s co-founder Luca Torre told me the fund’s main focus would be to invest in small financial companies in developing countries, on terms that encouraged them to help their clients — typically smallholder farmers — to build protections against climate impacts. While discussion of climate adaptation focused on large-scale infrastructure such as sea walls, he said, an equally crucial issue was “getting the right solution in the hands of vulnerable communities”.

Yet another new climate adaptation fund is in the works from California-based Convective Capital, which invests in start-ups seeking to address the growing risk of wildfires. Convective launched a $25mn fund in 2022, and made an official filing in January for a second fund with a target size of $75mn.

Founder Bill Clerico set up Convective after a move to rural California following his sale of financial technology company WePay, and swiftly coming under threat from a major fire. As he learnt more about responses to fire risk, he concluded that “we were using tools from the 1970s or earlier. I felt there was a much more modern approach needed.”

Convective has invested in 18 companies, with businesses ranging from tools to reduce the risk of sparks jumping from power infrastructure, to artificial intelligence systems for rapid fire detection. “Even 15 minutes faster detection could save billions in fire costs,” Clerico said, pointing to the disastrous wildfires in Los Angeles in January.

“There’s been this perception that working on resilience and adaptation [rather than emissions reduction] is giving up,” Clerico added. “For me it has to be ‘and’ not ‘or’. Climate change is already happening.”

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