The adaptation imperative

Financing requires rethinking infrastructure risk, value creation

Posted by Macquarie Asset Management

Sep 09, 2019


The effects of climate change are now so profound that simply building more green projects and changing behaviours are not likely to be enough.

With the risk that global temperatures climb by as much as 3°C above pre-industrial levels by the end of this century,1 an increasing number of academics and climate experts are advocating for large-scale efforts to adapt our societies, including critical infrastructure, to the realities of a warmer world with less predictable weather.

Effective climate change adaptation calls for significant shifts in the way we plan, design and finance communities and related infrastructure. Catalyzing finance for this shift requires a change in how we assess risk and assign economic value to future-proofing efforts. In order to invest for resilience, all stakeholders in the financing effort need to determine how to link adaptation benefits to revenues, cost-savings, risk reduction, and other quantifiable cash flows.

A long-term return

While some resilience investments will be capital intensive, adaptation offers an attractive long-term return. The Global Commission on Adaptation (GCA) estimates that investing $US1.7 trillion globally in adaptation from now to 2030 would yield more than $US5 trillion in net benefits, adding that adaptation investments have benefit-cost ratios ranging from 2:1 to 10:1.2

Climate change should be a fundamental consideration for anyone in infrastructure or public planning roles, said Christopher Leslie, Executive Chairman of Macquarie Infrastructure and Real Assets (MIRA), Americas. Recalling past conversations with a US government architect, Leslie said, “One of the key questions to anybody building new infrastructure is, which climate scenario are you building to? One degree, two degrees, three degrees, four degrees warmer? If you haven’t asked yourself that question, then you haven’t woken up to the problem or properly set out the investment case for the asset.”



Paying a triple dividend

Adaptation’s benefits are not exclusively limited to surviving a destructive storm or weather event. Instead, adaptation action offers a “triple dividend” – the social, environmental and economic benefits of investing in resilience.

An example of this is the Thames River Barrier, which helps protect 1.3 million people and $US275 billion in property value in greater London.3 After population growth and climate uncertainty created a water-stressed area, Thames Water built a desalination plant to increase the volume and reliability of supply. It has also built a large storage facility to address combined sewer overflow issues after storms.

Though the case for adaptation is compelling, the GCA report contends that most major investment and planning decisions made today do not consider climate change. “There’s a lack of appreciation of how much money could be saved through early or upfront spending on adaptation, given that climate change is going to be a persistent and ongoing phenomenon,” MIRA’s Leslie said. “There is going to be significant capital expenditure on recovery from climate change-related issues, which will drain GDP growth. Fiscal prudence and fiduciary duty demand that we invest in adaptation now rather than recovery later

Studies show that upgrading infrastructure to be more climate-resilient adds about 3 per cent to upfront costs. The return is particularly attractive in developing countries. The World Bank found that $US1 trillion in incremental spending to make infrastructure more resilient in developing countries would generate $US4.2 trillion in benefits.4

“One of the key questions to anybody building new infrastructure is, which climate scenario are you building to? One degree, two degrees, three degrees, four degrees warmer? If you haven’t asked yourself that question, then you haven’t woken up to the problem or properly set out the investment case for the asset.”

Transformative change needed

The GCA outlines four broad areas needed to transform the financing of climate change adaptation:

  1. Shift how investment decisions are made 
  2. Scale up and deploy public finance more effectively
  3. Scale up contingent finance and insurance mechanisms
  4. Harness private capital for resilience

To maximise benefits, adaptive principles should be built into investment and financing decisions from the beginning, not considered as an add-on after other financing decisions have been made. Resilience should be integrated into all infrastructure assets and systems throughout their lifecycles. Government institutions and agencies, developers, operators, owners, data providers and communities each play crucial roles.

Financial protection strategies, which combine financial reserves, pre-arranged credit and insurance, have a role to play in supporting the resilience of critical infrastructure. The GCA believes these measures will improve overall risk assessment, encouraging proactive risk reduction and enabling more rapid recovery post-disaster. Over the long term, companies that adopt sensible risk-reduction and management strategies will face lower costs of capital.



Changing the playing field

Another useful tool is the concept of “blended finance,” in which public and private sector institutions work together to incentivize capital flows into adaptation efforts. Private capital responds to commercially attractive, risk-adjusted returns. For example, models that link infrastructure with land value capture – which enables stakeholders to recover investment costs through land value increases – can help make adaptive measures more commercially rewarding and investable. 

While the challenges posed by climate change can be complex and require a high degree of coordination by multiple stakeholders across the public and private sectors, there is reason for optimism, said Brooks Preston, Managing Director at MIRA. “In many cases, we don’t need new technologies or new designs to solve it. It just takes another layer of investment discipline and systems thinking to merge the climate change implications with asset design and operations. We are seeing evidence that investors get rewarded for that discipline.”


Macquarie Group CEO Shemara Wikramanayake is a founding Commissioner of the Global Commission on Adaptation.

Keywords: Renewable, Energy

Find out more about Macquarie Asset Management.


2,3 GCA report, September 2019 “Adapt Now, a global call for leadership on climate adaptation”

4 Lifelines: The Resilient Infrastructure Opportunity, Hallegatte, et al, June 2019, World Bank


This market commentary has been prepared for general informational purposes by the authors, who are part of Macquarie Infrastructure and Real Assets (MIRA), a business division of Macquarie Group (Macquarie), and is not a product of the Macquarie Research Department. This market commentary reflects the views of the authors and statements in it may differ from the views of others in MIRA or of other Macquarie divisions or groups, including Macquarie Research. This market commentary has not been prepared to comply with requirements designed to promote the independence of investment research and is accordingly not subject to any prohibition on dealing ahead of the dissemination of investment research. Nothing in this market commentary shall be construed as a solicitation to buy or sell any security or other product, or to engage in or refrain from engaging in any transaction. Macquarie conducts a global full-service, integrated investment banking, asset management, and brokerage business. Macquarie may do, and seek to do, business with any of the companies covered in this market commentary.  Macquarie has investment banking and other business relationships with a significant number of companies, which may include companies that are discussed in this commentary, and may have positions in financial instruments or other financial interests in the subject matter of this market commentary. As a result, investors should be aware that Macquarie may have a conflict of interest that could affect the objectivity of this market commentary. In preparing this market commentary, we did not take into account the investment objectives, financial situation or needs of any particular client. You should not make an investment decision on the basis of this market commentary. Before making an investment decision you need to consider, with or without the assistance of an adviser, whether the investment is appropriate in light of your particular investment needs, objectives and financial circumstances. Macquarie salespeople, traders and other professionals may provide oral or written market commentary, analysis, trading strategies or research products to Macquarie’s clients that reflect opinions which are different from or contrary to the opinions expressed in this market commentary. Macquarie’s asset management business (including MIRA), principal trading desks and investing businesses may make investment decisions that are inconsistent with the views expressed in this commentary. There are risks involved in investing. The price of securities and other financial products can and does fluctuate, and an individual security or financial product may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international or local financial, market, economic, tax or regulatory conditions, which may adversely affect the value of the investment. This market commentary is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in this market commentary. Opinions, information, and data in this market commentary are as of the date indicated on the cover and subject to change without notice. No member of the Macquarie Group accepts any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this market commentary and/or further communication in relation to this market commentary. Some of the data in this market commentary may be sourced from information and materials published by government or industry bodies or agencies, however this market commentary is neither endorsed or certified by any such bodies or agencies. This market commentary does not constitute legal, tax accounting or investment advice. Recipients should independently evaluate any specific investment in consultation with their legal, tax, accounting, and investment advisors. Past performance is not indicative of future results.


This market commentary may include forward-looking statements, forecasts, estimates, projections, opinions and investment theses, which may be identified by the use of terminology such as “anticipate”, “believe”, “estimate”, “expect”, “intend”, “may”, “can”, “plan”, “will”, “would”, “should”, “seek”, “project”, “continue”, “target” and similar expressions. No representation is made or will be made that any forward-looking statements will be achieved or will prove to be correct or that any assumptions on which such statements may be based are reasonable. A number of factors could cause actual future results and operations to vary materially and adversely from the forward-looking statements. Qualitative statements regarding political, regulatory, market and economic environments and opportunities are based on the [authors’ // relevant MIRA team’s] opinion, belief and judgment.


Other than Macquarie Bank Limited ABN 46 008 583 542 (MBL), none of the entities noted in this document is an authorized deposit-taking institution for the purposes of the Banking Act 1959 (Commonwealth of Australia) or banking legislation in other jurisdictions. The obligations of these entities do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of these entities.