The elusive price of resilience

When a factory owner raises stock above flood level, fits ember-resistant vents or shifts working hours to avoid peak heat, success is measured largely by what does not happen. Stock stays dry, buildings stand and workers remain productive. The value of adapting to climate risks—and of the resilience it creates—is easier to see after a shock than to price beforehand.

The difficulty of pricing resilience is becoming more consequential as the financial costs of a warming planet rise. Climate- and water-related extremes caused trillions of dollars of economic losses over recent decades. S&P Global reckons that, without adaptation measures, physical risks could cost the world’s largest companies around $1.2trn a year by the 2050s. While adaptation has become a material investment concern, capital has yet to catch up. The UN Environment Programme says that developing countries alone will require $310bn–$365bn a year for adaptation by 2035, compared with $26bn of international public finance in 2023. The gap will be in focus at COP31, the UN’s climate summit in Turkey in November, where the presidency aims to build on last year’s call to at least triple adaptation finance by 2035. But mobilising more capital will also depend on making resilience a more compelling financial proposition.

The missing resilience premium

The biggest obstacle, especially for private investors, is that adaptation and resilience projects rarely generate direct, trackable investment streams. Climate hazards are uncertain, their worst effects may lie years ahead and adaptation pays through losses avoided rather than revenues earned. A company may foot the bill for flood defences even though much of the benefit accrues elsewhere, through lower insurance claims or fewer disruptions for customers and suppliers. That makes it hard to judge which investments are worthwhile and who should pay.

Many firms are not yet equipped to make that judgement themselves. A 2024 survey found that only 21% of companies have an adaptation plan; among those that did, 69% do not quantify its cost (see figure). That points to the broader problem of companies struggling to translate climate risk and resilience into effects on asset values and operational continuity.

Financial markets face the same problem. Because physical risk is mispriced, says the Institutional Investors Group on Climate Change, resilience investment often goes unrewarded. Part of the difficulty is technical. The Bank for International Settlements notes there is still no accepted model for adjusting credit risks for physical climate hazards. Without standardised, verifiable benchmarks, financiers struggle to distinguish—and reward—assets that are better protected.

The same measurement challenge will be the focus of negotiations at COP31, where governments are expected to advance on 59 indicators adopted at COP30 to track progress towards the UN’s Global Goal on Adaptation. Although not designed to assess the financial risks of individual assets, they reflect the broader need to make resilience measurable.

Yet measurement alone will not ensure resilience is rewarded. A lender with a five-year exposure has little reason to value protection against a flood that may not come for 15 years, while capital rules rarely reward borrowers for being better prepared. Better measurement could begin to change that, allowing lower risk to translate into more favourable financing terms and helping attract capital to assets that might otherwise look uninsurable or uninvestable.

Credit where credit is due

The value of adaptation is becoming easier to quantify, even if it is an imperfect science. The World Bank estimates that making new infrastructure in poorer countries more resilient would add roughly 3% to overall investment needs, yielding about $4 in benefits for every dollar spent, largely through avoided disruptions and damage. The IFC, the World Bank’s private-sector arm, and AXA Climate, an insurance advisory unit, modelled adaptation on three Brazilian infrastructure assets. In one energy grid, adaptation measures including firebreaks cut annual services outages by some 85%, protecting about $8.60 in value for every dollar spent. Although illustrative, it shows how avoided losses can be expressed as changes in default risk and cash-flow volatility. These are things financiers already price.

Better disclosure should help make those differences more visible. Frameworks such as the European Sustainability Reporting Standards and International Reporting Standards S2 are pushing firms to assess and report their exposure to physical climate risks. More consistent information could make it easier for investors and lenders to distinguish between assets that are merely exposed and those whose risks have been actively reduced.

Insurers are already the closest to doing so. In Australia, four insurers now cut the bushfire component of premiums by up to 60% for homes with verified resilience improvements under a national Resilience Ratings Scheme, trimming total bills by 5–21%. Regulators are often the catalyst. In the United States, California has required insurers to offer discounts for wildfire mitigation since 2022, ranging from 4% to 40%. Alabama requires discounts for homes built or retrofitted to a verified hurricane-resistant standard. Resilience is now showing up in asset values. One Urban Land Institute study found that fortified homes in two of Alabama’s coastal counties sold for nearly 7% more than comparable homes.

Banks have further to go, but the levers are becoming clearer. Regulators already accept in principle that climate risk belongs in lending decisions. The Basel Committee expects banks to weigh material climate risks throughout the life of a loan. Britain's Prudential Regulation Authority says banks are beginning to quantify physical climate effects on expected credit losses, but need more granular assessments and better scenario analysis. Cambridge researchers propose going further by building physical risk and resilience directly into measures of default risks and potential losses.

Financing structures can reinforce those incentives. Sustainability-linked loans can lower borrowing costs when companies meet agreed resilience targets. Longer maturities may matter, too. The IFC finds that extending loan tenors can do more to make adaptation investments bankable than simply lowering interest rates.

The COP31 presidency hopes its Climate Implementation Bridge will turn national climate commitments into investment-ready projects. But a fuller pipeline alone will not unlock private capital. For adaptation, the harder task is persuading financiers to put a price on losses that never occur.