Capitalizing on the coming boom in adaptation and resilience
With demand for a bewildering array of solutions expected to ramp up considerably in the coming years, how are investors coming to grips with the opportunity?
There are times when demand for certain products and services surges in a short space of time. By spotting these trends and providing the funding to scale capacity, investors can profit while helping to fulfil vital needs.
Take the market for climate adaptation and resilience solutions: according to a recent report by GIC, Singapore’s sovereign wealth fund, it could grow from an estimated USD1 trillion today to USD4 trillion by 2050.
Enablers and suppliers of these solutions “can probably scale three to four times in the next five years because demand will just go through the roof,” said Daniel Oehling, Managing Director and Partner at Boston Consulting Group (BCG).
Identifying specific opportunities to focus on can be daunting, however. The climate adaptation and resilience universe is vast, encompassing everything from sea walls and early flood-warning systems, to weather-resistant building materials and more efficient air conditioners, to drought-resistant crops and water-conserving agricultural technologies.
“The sector feels quite complicated to navigate – people haven’t figured out how to approach it,” said Oehling. “But with a bit of effort, you can map it out quite nicely,”
The first step is to categorize the opportunity. “That’s an exciting part of the development of the field, because there isn’t yet an established way to categorize it,” said Linda-Eling Lee, Founding Director and Head of the MSCI Sustainability Institute.
Rather than lumping the opportunity under established industrial sectors, one emerging approach is to begin with specific risk factors, such as floods or wildfires, and then work backwards to a list of potential solutions, she said. “Then you come up with a set of opportunities that doesn’t always fall neatly into categories like health or infrastructure technology.”
GIC and J.P.Morgan, for example, start by identifying specific risks and then pinpoint solutions (see Figure 1).
Another approach, taken by BCG and Singapore investor Temasek in their detailed guide to the opportunity, is to begin with the desired outcome, such as creating resilience for food, infrastructure, health, water, energy, biodiversity, and communities and businesses.
A good fit for private markets
According to Oehling, “there’s a misperception that the companies in the sector are still very early stage, sub-scale and not yet profitable, so they don’t yet fit the bill for mainstream private equity investment.” This has, to date, tempered investor interest.
He said that, in reality, companies supplying solutions within the most promising sub-sectors, including climate-adapted agricultural inputs, climate-resistant building materials, water efficiency and distributed energy, are already in the “sweet-spot” where private equity would typically come in.
Oehling offered the example of flood-resistant coatings for buildings, which could increasingly be required by regulations in flood-prone areas. Among the suppliers of these coatings are profitable family-owned businesses with very established products that may not have the financial means to meet such a rapid increase in demand.
“Beyond providing the capital, private equity is a good owner for these kinds of businesses because they have the playbook and mindset to help companies get through this extremely high growth in a very short timeframe,” he said.
Oehling also highlighted medical services and equipment as likely to see a sharp rise in demand in coming years. “Increased global temperatures will spur the proliferation of diseases, including new ones,” he said. Another sub-sector that is relatively small today but could grow significantly is climate intelligence, he said, encompassing hazard warning providers, catastrophe risk analytics providers and climate analytics companies.
Uncovering publicly listed plays
Many publicly listed companies also offer climate adaptation and resilience solutions. MSCI Sustainability Institute recently teamed up with the Global Adaptation and Resilience Investor Working Group to use an artificial intelligence (AI) large language model (LLM) to spot companies in every industry that are selling data, technologies or equipment that can help governments, businesses and households prepare for and adapt to the impacts of climate change.
They found that more than 800 listed companies, or about 11% of the global total, cater to climate adaptation and resilience in some way.
AI helped pinpoint these companies by cross-referencing specific hazards with solutions and locations, said Lee at MSCI. “It’s really important to match the problem you’re trying to solve with a product or solution, but it has to be very location or context specific.” There’s no point, for example, in investing in a company that produces a useful solution for wildfires, but does not supply them to places experiencing worsening wildfires.
Lee stressed that the aim of the exercise was not to identify companies to actually invest in, but to get investors thinking about how they can apply AI and LLMs to start uncovering opportunities of their own in the climate adaptation and resilience universe. “We wanted to be able to demonstrate that this is something that they can do, so we shared the methodology for anyone to use.”
“You need to think about which areas you’re most excited by or have the most conviction about,” she added. “And based on that, there’s an analytical tool now that allows you to explore and come up with a set of potential opportunities that you can then evaluate.”
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