GCBC Insights: From Physical Risk to Financial Resilience – Tools for Finance Practitioners
By: Ronan Hodge
In a year of further climate-related catastrophes, it’s no surprise that climate adaptation has risen up the agenda, along with a flurry of new reports and analysis.
The heatwave across Europe this summer caused as much as €17bn of agricultural losses and strained power systems, with estimates of 35,000 excess deaths on the continent.
Shocking flash floods triggered by the glacial collapse along the Nepal-Tibet border resulted in over a thousand deaths, thousands more missing persons, and widespread destruction with reconstruction costs estimated around $4-5bn, around 10% of Nepal’s GDP.
And looking ahead, scientists and international bodies have issued severe warnings regarding the ongoing "super" El Niño event. Its collision with baseline global warming is anticipated to create unprecedented physical, human, and economic risks – with up to 451,000 additional heat-related deaths worldwide. The heaviest human and economic toll would fall on climate-vulnerable developing nations – such as India, Indonesia, Nigeria, and Brazil – that are already struggling with food insecurity and energy inflation.
Against this backdrop of devastation, the economic case for investing in adaptation is becoming increasingly compelling.
Analysis from Schroders released at Climate Week NYC found that 95 of 102 adaptation activities modelled generate avoided losses at least equal to their costs, with a median benefit-cost ratio of 3.1x. First Street’s analysis found that 94% of “high exposure/low preparedness” companies have at least one adaptation measure offering positive savings today, with a median benefit-cost ratio of roughly five times that rises substantially over longer horizons. This is consistent with the Global Commission on Adaptation’s finding that every dollar invested in resilience returns between two and ten dollars 1.
With adaptation investment needs estimated at up to US$1.2 trillion a year by 2050, the opportunity is substantial.
But a high benefit-cost ratio is not the same as investable return. Adaptation can deliver substantial economic and societal benefits, but they do not necessarily generate cash flows that private investors can capture, in part because the value of resilience often takes the form of avoided losses spread across many parties. Schroders’ literature review found little evidence of a persistent, portfolio-wide “adaptation alpha” 2. Instead, they suggest that resilience may be more valuable as a corporate quality attribute: “Hardening a company's asset base lowers operational disruption, earnings variability, and tail risk supporting earnings continuity, asset protection and lower tail risk.”
For financial institutions, the increasingly apparent consequences of climate change affect asset values, revenues, operating costs, creditworthiness and insurance availability, creating material risks across loan books and investment portfolios.
Indeed, financial institutions are increasingly seeking tools to assess companies’ asset resilience, similarly to how transition plans have helped them assess companies’ strategic response to the transition. IIGCC’s Climate Resilience Investment Framework provides a useful framework for what could be captured within an investor adaptation and resilience plan.
Discussions on adaptation at major convenings have indicated three key challenges for financial institutions as they assess resilience and finance adaptation opportunities.
First, the need to make avoided losses visible.
Adaptation requires decision-makers to invest now to avoid losses later. Making that case means quantifying the hazard and how much an intervention reduces risk, then translating it into the language of finance: loss curves, probability of default, insurance pricing and valuation.
But major information gaps remain in corporate disclosures: an analysis of more than 25,000 companies found that while 81% mention physical climate risk, only 27% explain how it could affect their business. More than a third of companies categorised as “high exposure/low preparedness” didn’t disclose measures to protect their assets.
GCBC member Arc launched Resilience Arc earlier this year to help address these gaps, bringing together information on physical risk exposure with resilience datasets and insights to fully understand the resilience of portfolio companies.
The Climate Bonds Resilience Taxonomy (CBRT) and UNEP-FI’s mARs framework can also provide a science-based approach to identify and assess investments that contribute to adaptation and resilience.
Second, the need to look beyond the asset boundary.
An individually resilient building can still lose value if surrounding power, water, transport or insurance systems fail. Similarly, an individually resilient company can fail if its suppliers or customers are impacted.
A new playbook from Marsh & WEF can help lenders, insurers and real-asset investors consider how to make place-based resilience part of asset-level financial risk. And last year, GCBC member World Business Council for Sustainable Development (WBCSD) produced a CEO handbook to support executive engagement on value chain resilience.
These resources and others on the GCBC Knowledge Hub can help financial institutions assess the resilience not only of individual assets, but of the wider systems and value chains on which they depend.
Finally, the need to match financing structures to who captures the benefit.
When resilience protects a company's own assets, revenues or insurance costs, the benefits may be more readily priced in to conventional lending, investment and underwriting. When the benefits are spread across many beneficiaries, such as a river catchment, a supply chain or a city, they may be harder to monetise and require aggregation, guarantees or concessional capital to make them financeable.
Gfanz's Investing in Resilience report includes 22 in-depth case studies that show how financial institutions are structuring finance across this spectrum, and draws out practical lessons for doing so, including:
Value stacking: Viable investment cases rarely rest on a single cashflow. They combine avoided losses, lower insurance premiums, business continuity and sometimes, new revenues.
Aggregation: Pooling small, fragmented projects into diversified portfolios or funds can help meet institutional investors’ requirements for scale and diversification.
Catalytic public finance: Where private cashflows value streams fall short, concessional capital is most effective when it covers project preparation costs or absorbs first losses, crowding in private finance.
Importantly, these case studies challenge the view that adaptation is a job for public finance alone. Nearly half involved only private financial institutions, often using conventional loans, bonds, equity and insurance.
The challenge ahead is to turn growing recognition of physical climate risk into better financial decisions. That means making avoided losses visible, assessing resilience beyond individual assets, and using financing structures that reflect who captures the benefits. The frameworks and tools highlighted here – and many more available on the GCBC Knowledge Hub – give practitioners and policymakers alike an increasingly credible basis for doing so.
Footnotes:
Global Commission on Adaptation, Adapt Now: A Global call for Leadership on Climate Resilience (2019) finds that investing US$1.8 trillion in five adaptation areas from 2020 to 2030 could generate US$7.1 trillion in net benefits.
This is in contrast to analysis that finds companies that support adaptation and resilience have outperformed in recent years. For example, Bloomberg Intelligence note the Bloomberg Prepare & Repair Index (BPRAET) outperformed the S&P 500 by 500 basis points in 2025, and by 7.2% annually over the past five years.
