It’s been called the “unavoidable opportunity.” Emissions baked into the atmosphere are already profoundly altering weather patterns, creating surging demand for solutions that can help communities adapt to a changing climate.
An estimated $1.3 trillion a year is needed annually to adapt to climate change. And governments and corporate backtracking on climate commitments means the imperative for adaptation and resilience, or A&R, investments will only grow.
What was once considered uninvestable has quickly grown to what a new report by BCG and Temasek calls “one of the defining markets of the future.”
The market for climate intelligence solutions, such as risk analytics and hazard warnings, is expected to grow 15% per year in the next five years. Demand for flood defense systems: up as much as 10% per year. Climate-resilient building materials are expected to see up to 8% annual growth over the same period.
As governments, communities and businesses look to strengthen their defenses against climate change, “the market is primed for investors to act now,” write the authors of “The private equity opportunity in climate adaptation and resilience.” In particular, they say, “Private equity investors can invest behind the swelling demand for A&R solutions and generate attractive returns.”
To drive private capital into the pipeline of solutions, BCG and Temasek, the Singapore state-owned global investment company, have mapped out seven opportunity sectors based on their investment readiness, stage of development and commercialization, and market demand.
Climate-smart agricultural inputs, cooling systems, supply-chain resilience, and climate insurance are seeing the most private investment activity in the A&R space, and have strong market demand. On the other end of the spectrum, urban planning, climate-related disease research, social protections, and adaptation-focused lending all have low investment activity.
First movers
The nascent stage of the market means that PE investors can get it early and help companies with A&R solutions scale. But that won’t be the case for long as dedicated funds spring up to invest in adaptation and resilience. The Lightsmith Group raised a $185 million fund in 2019 to seize the opportunity. The New York-based firm is also piloting a one-stop-shop for adaptation startups that can provide credit and technical assistance in addition to equity capital.
The European asset manager Mirova debuted its $250 million Environment Acceleration Capital Fund in 2021. The fund will invest in verticals including smart cities, agriculture tech and recycling and reuse. BlueOrchard’s second InsuResilience Investment Fund raised $100 million to invest in insurance solutions for farmers, small businesses and infrastructure in Asia, Latin America and Africa.
Mapping the field
Like climate change, the need for adaptation and resilience will touch almost every sector of the economy, making it an unwieldy category for investors to get their arms around. “What investors need is a classification system based on how markets are structured, with comparisons of market sizes and growth rates, competitive dynamics, and profitability,” BCG and Temasek argue.
To help investors find their way in the opportunity landscape, BCG and Temasek organize their map thematically, charting opportunities in food, infrastructure, health, businesses and communities, water, energy, and biodiversity. Then by technology subsectors. Then by individual solutions and their level of market maturity.
Take climate-smart agriculture inputs. Development of commercial crop seeds is in high demand, but still largely a sector for scrappy biotech startups and agriculture giants with large R&D budgets – there isn’t much room for private equity for now.
On the other hand, the development of new crop protections has matured to the point that there are both growth funding and buyout opportunities. Temasek-backed Pivot Bio, whose soil inputs are meant to reduce dependence on synthetic fertilizers, raised a $430 million Series D round in 2021. Pairwise last year gathered up a more modest $40 million Series C round, with backing from growth-stage investor Aliment Capital, for its plant gene editing technology.
Another here-and-now opportunity is the fast-growing field of climate intelligence solutions, including climate risk analytics and systems that can warn of impending hazards. Regulators are increasingly requiring climate risk data, and private credit rating agencies and insurers are looking to bolster their capabilities.
S&P acquired The Climate Service, a Durham, North Carolina-based firm that quantifies climate risks for corporations, investors, and governments. Moody’s nabbed Four Twenty Seven, a Berkeley, Calif. provider of physical climate risk data. The deals, the authors say, “show the possible exit strategies for private equity investors in this segment.”
The case for A&R
Most private climate finance focuses on mitigation efforts. “At current levels of mitigation activity,” the authors warn, “the average global temperature is likely to remain on a trajectory to exceed a three-degrees Celsius increase over pre-industrial levels.”
Aside from the human and environmental toll, that could jeopardize profits in key industries like telecommunications, utilities, food and construction by as much as 25%. Investing now in climate adaptation and resilience “is catalyzing the creation, maturity and growth of companies working to develop, deploy and scale climate-related innovations worldwide.” That in turn is building for private equity investors, from early stage to buyout, a full pipeline of opportunities.
“We often hear that climate A&R investment opportunities will materialize in the future,” write the authors. “This report shows otherwise: the opportunity exists today.” A separate report from GIC, another Singapore sovereign investor, and Bain Capital tallies the adaptation investment opportunity across public and private debt and equity at $2 trillion today, growing to $9 trillion by 2050.
ImpactAlpha’s Lucy Ngige contributed reporting.
