Is the tide turning on climate adaptation funding?

2023 was the hottest year humans have ever measured — 1.52°C above the 1850–1900 pre-industrial average. For millions, the planet is already too hot, causing extreme weather events, droughts, and communities to suffer.

Technology startups have huge potential to help us adapt to this new reality by improving early-warning systems, reducing water contamination, increasing food security, and scaling resilient infrastructure in nature and cities.

Yet these solutions currently only receive 7% of global climate tech funding, with the lion’s share historically invested in technologies that help us mitigate the causes of climate change.

Here, we explore why that could be about to change.

MITIGATION vs. ADAPTATION

So what’s the difference? While climate mitigation addresses the root cause of the climate crisis (emissions), adaptation addresses its effects.

Whereas the benefits of mitigation are evenly distributed in time (current & future generations benefit) and space (impact is global), the costs and benefits of adaptation tend to be local.

THE FUNDING GAP

Firstly, what is it? When we talk about adaptation finance we are talking about financial resources that help communities, companies, countries, and regions adapt to the impact of climate change.

Think:

• Relocating an infrastructure project away from areas with rising sea levels
• Supplying drought-resistant seeds for farming
• Building a dam with a larger retention basin to account for increasingly variable rainfall

And why is it increasingly important? The latest report by the Intergovernmental Panel on Climate Change makes clear the world is rapidly approaching a level of warming that will make it significantly harder to manage drought, heat waves, rising sea levels, and other climate-related disasters.

Alongside efforts to curb emissions, therefore, we need to start investing substantial resources in building climate resilience and adapting to the changes already underway.

In fact, the U.N. Secretary-General, António Guterres, has called for 50% of the total share of climate finance to be spent on climate adaptation.

The Adaptation Finance Gap. Source: UNEP 2018

To date, most climate venture dollars have been deployed into mitigation — nearly 60% into mobility alone. Climate adaptation accounted for only 7% of global climate-related investments (Climate Policy Initiative 2021).

Currently, only <2% of adaptation finance comes from private sources. Public funding accounts for more than 98% of the $30B in annual adaptation spend. It is widely recognised that public finance alone will not meet the current funding gap in adaptation.

CHALLENGES FOR INVESTORS

But increasing VC / private sector finance for climate adaptation presents unique challenges.

For instance, while renewable energy is a promising sector with revenue models well understood by investors, the same cannot easily be said of adaptation measures. This has led to uncertainty about whether the private sector can — or should — fund adaptation on a larger scale.

There are many challenges to investing in adaptation:

• Adaptation addresses chronic risks (summer heatwaves) and acute shocks (climate-related disasters). For startups, it is hard to build a business around 1-in-X year events;
• Adaptation measures are deployed hyper-locally. Startups need to be creative with their go-to-market strategy and how to scale while taking local context into consideration;
• Finally, the communities hit first and hardest by the climate crisis are often the least resourced. Many face restricted access to capital and social prestige — customer groups that have not always been well-served by tech companies.

SOLUTIONS WE’RE EXCITED ABOUT

Still, startups and venture capital have an important role to play in increasing climate resilience. We are for example incredibly excited by entrepreneurs developing scalable solutions to help humankind adapt to climate change by:

• Supporting people through financial shocks, like insurance and technology-enabled financial tools;
• Enhancing livelihoods, like climate-smart agriculture technologies;
• Increasing the resilience of their communities, like secure property rights and sustainable supply chains.
• As more and more sectors are bearing the brunt of the climate crisis, climate prediction startups will also see more investors backing up their innovations.

Bank of America estimates that the climate adaptation market could be worth as much as $2 trillion annually within five years.

The most interesting sectors will be those likely to be hardest hit by climate change. That includes those with the largest exposure to water-related risks: 1) agriculture, 2) aquaculture, 3) finance/insurance/real estate, and the long tail of manufacturing and mineral processing.

We should focus on categories where a business model or technological innovation will bring down costs and improve the quality of life for a large number of people.

CLIMATE ADAPTATION TECH

This area of investment already has a name. Climate adaptation tech is a new category being used to describe technology innovations that support industry and society to adapt to our new climate reality.

What investing in this vertical looks like is: instead of looking at an early-stage pre-cast concrete block manufacturer for use in sea walls, it could be looking at companies using earth observation, weather/climate modeling tools, and sea level data, plus AI, to determine where the seawall/ flood-related infrastructure should be built and why.

These kind of solutions include:

• Improving early warning systems: Platforms that improve decision-making and preparedness around unsafe weather events (floods, fires, poor air quality, etc.). There has been a growing group of climate intelligence startups using AI and data to predict weather;
• Advancing food security: Solutions that work within existing agricultural distribution networks to reduce inputs, increase yields, and improve post-harvest transport/ storage to avoid food loss & waste;
• Improving water and wastewater systems: Companies that reduce water contamination, improve wastewater and stormwater management, and expand access to clean drinking water;
• Scaling resilient infrastructure: Low-cost, modular technologies as well as nature-based solutions that strengthen existing or build new infrastructure, including Energy Grid Resiliency;
• Reducing heat stress: Technologies that expand access to efficient refrigeration and cooling or bolster the cold chain.

LET’S COLLABORATE!

This is a new space for all of us.

The challenge rests on the misconception that there is a discrepancy between mitigation and adaptation. It is vital that as the world travels towards net zero and nature positive adaptation and mitigation activities are integrated. As the IPCC puts it: “The solution lies in climate-resilient development. It integrates adaptation and mitigation to advance sustainable development for all…”.

At Planet A we will continue to look out for solutions that combine climate mitigation with adaptation. Our investments so far include:

• OPTIML — Helping real estate developers understand and act on climate risks to properties;
• GoodCarbon — Accelerating investment into nature-based climate solutions, like mangrove forests;
• Dovetail — Supporting the finance sector in understanding the risks and opportunities of the climate transition and channeling more capital towards climate-smart assets;
• The Landbanking Group — establishing the first Nature Equity management platform, incentivising conservation and regeneration of natural resources.

We expect climate adaptation to become a growing focus for investors and founders alike. If you are a founder working in this space, we’d love to hear from you. Get in touch with the team — we can’t wait to meet you and hear more about what you are building.

Author: Lena Thiede, Co-Founder and General Partner at Planet A