Ten key requirements for a systemic approach to climate adaptation

At a glance

• Humanity has already experienced climate change in the course of its long evolution and responded through various forms of adaptation. However, today’s climate challenge differs in two important ways from those of the past. First, it is happening much more quickly than ever before. Second, climate risks are rising in the context of established and complex systems, including where and how crops are grown, cities built, goods and services produced, supply chains organized, and other economic activities conducted. Such systems have been built on the assumption of a stable climate and, in the absence of an appropriate response, are clearly at risk from climate change.
• These differences have three critical implications. The first is that adaptation will be necessary but not sufficient on its own to manage a changing climate effectively over time. Second, any forward-looking approach to adaptation must be substantially more deliberate than the organic approaches of the past were. The last is that as with the transition to a net-zero economy, adaptation requires a systemic view to support local, national, and global efforts and to ensure that it is as orderly and effective as possible.
• The research behind this article develops a framework for a systemic response to adaptation, highlighting all the elements that must come together in a linked and connected way. We identify ten key requirements across four categories: a climate risk management mindset; technological and behavioral adaptation levers; economic and societal adjustments; and governance, institutional support, and commitment.
• For each of these ten requirements, we found early examples of progress. For example, many of the technological and behavioral solutions needed for successful adaptation already exist in some form—in contrast to mitigation, where the required technologies are still lacking in certain sectors. Likewise, climate data has become much more accessible in both public and private forms, and hazard and economic-loss models are maturing. However, across the board, progress remains nascent. For instance, while some initial progress has been made in the public sector—84 percent of 197 individual sovereign states plus the European Union have published some version of a national adaptation plan—large gaps remain. The majority of these plans lack a sense of risk preference or tolerance (that is, how much risk can be accepted). Adaptation solutions typically are not fully tied back to the physical risks they ameliorate, and the required investment levels are often not specified. Most important, the majority of these plans must still be resourced and executed.
• As private- and public-sector actors consider the framework proposed in this article, it is important to note that not all parts of the world will be equally exposed to rising risks during this decade. Even the exposed parts of the world may not face equally severe risks. These differences are not a justification for inaction. On the contrary, it is important for all parties to use this time as an opportunity to deploy the adaptation measures needed in the near term, to embed adaptation considerations in decisions that have long-lived consequences, and to build the capabilities needed to make robust adaptation decisions over the longer term. This will take both time and effort.
• In adaptation as in mitigation, it is crucial not to let the perfect be the enemy of the good. Numerous measures can be embarked on today with relative ease—for example, beginning to develop a climate risk management mindset to evaluate and implement adaptation decisions and deploying technological and behavioral solutions (such as the greening of urban spaces or painting roofs white to manage heat) that are relatively low cost, have co-benefits, and do not pose maladaptation risks.

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From the dawn of Homo sapiens, around 200,000 years ago, to the present day, adaptation has been humanity’s primary response to changes in the Earth’s climate. In other terms, as the climate has changed, humanity has gradually altered its way of life to thrive under new conditions. Indeed, the spread of early humans out of Africa and across the globe was inspired by the search for favorable environmental conditions during a geological period of great climate disruption. Over the last several hundred thousand years, the Earth’s climate—driven by orbital changes—has cycled between temperate periods and glacial ones, when much of the Northern Hemisphere was covered in ice. The spread of Homo sapiens across the world corresponds strongly to the resulting patterns of shifting temperature, rainfall, and vegetation.

Such organic adaptation efforts continue to take place in the context of today’s climate exposures, though with the benefit of tens of thousands of years of societal and technological progress. For example, to manage heat risk, GIFT City, a central business district under construction in the state of Gujarat in India, is building a district cooling system that distributes centrally chilled water to consumers through underground pipes. Compared with fitting out protected homes with individual air-conditioning units, this system reduces the energy demand of providing cooling assistance by 35 to 50 percent. The Netherlands, which faces severe flood risk because of its low elevation, is widening rivers, digging flood channels, and adding catchment areas. As a result, the major rivers that make up the Netherlands delta can now safely carry thousands more cubic meters of water per second than they could 30 years ago.

However, today’s climate change challenge differs in five important ways from the earlier instances in the course of human evolution:

1. Climate change is now the direct result of human activity and bound to continue until net-zero emissions are reached. In past cases, humanity was merely a “taker” of change; it is now also its maker. Humanity therefore faces a dual task: mitigating climate change (and, more broadly, regaining an equilibrium with nature) and adapting to the impact of the change that has already occurred or is “banked.” Another facet of anthropogenic climate change is that it is more uncertain, both given uncertainty about how human activity could shift and uncertainty related to the modeling of the impact of climate change. Decision-makers must therefore act in a context of uncertainty about the magnitude of the changes ahead, as they depend on the decisions of others.
2. It is happening much more quickly than it did in the previous instances of greenhouse gas–driven climate change. Indeed, the rate of present-day carbon release has no precedent during the last 66 million years, at least.
3. With temperatures already higher than at any time in the past 125,000 years, additional warming threatens to create, for the first time in human history, temperatures beyond the general tolerance of multiple species, from human beings to warm-water corals—fundamentally threatening the habitability of some of the most populated parts of the Earth.
4. Natural capital is being depleted across multiple planetary boundaries—for example, the biosphere’s integrity, biogeochemical flows, and ozone depletion—and faster than it can be rebuilt. This both magnifies the impacts of a changing climate and is magnified by it.
5. Climate change is now happening in the context of a much larger human population and a civilization that has evolved in a period of climate stability and is predicated, in fundamental ways, on the assumption that this stability will continue. Human well-being depends at present on a highly complex economy built around geographically fixed physical assets, sedentary populations, and political boundaries that make some of the past solutions, such as at-scale migration, much harder. All these systems have not only been built for a different climate but are also, in many cases, already functioning on the edge of their capacity because of age, population growth, or other nonclimate factors.

These five differences have three critical implications.

First, adaptation will be necessary but not sufficient on its own to manage a changing climate over time effectively. Indeed, even in a hypothetical idealized scenario in which emissions stopped today, the impact of climate change would continue to intensify as parts of our planet slowly adjusted to this new, warmer, climate state. This would hold true even if one were to achieve the goals enshrined in the 2015 Paris Agreement, which aims to limit warming to well below 2°C (and ideally 1.5°C) relative to preindustrial levels. However, recent studies from the United Nations have found that global emission trends are already offtrack from the mitigation pathways needed to meet the Paris Agreement’s temperature goals and that the window to change course is rapidly closing.

At the same time, there are both hard (physical) and soft (institutional or economic) limits to what adaptation alone can achieve. Recent research suggests that the world may already be approaching at least some (though by no means all) of these limits (see sidebar “The limits to adaptation”). As such, adaptation and mitigation must occur together: this is a true case of “and,” not “or.” In fact, there is a nexus between climate adaptation, climate mitigation, natural capital restoration, and economic development, which could have clear co-benefits in some areas if pursued together judiciously.

The second implication is that today’s approach to adaptation must be substantially more deliberate than the organic approaches of the past were. Because nearly every aspect of our society—from where houses are built and crops grown to how engineering and design standards are set to how capital is invested—is predicated on the implicit assumption of climate stability, significant adaptation will be necessary over time to prevent major disruption to current socioeconomic systems, particularly at higher levels of warming. Adaptation will require a fundamental shift in assumptions about risk. There will be a need not only to use physical levers, such as building seawalls and installing air-conditioning units, but also to change behavior and rethink approaches to the transfer of risk.

In addition, present-day climate change is occurring at a time when other important risks—macroeconomic, geopolitical, and public-health related—also threaten the stability of the world’s economic and social systems, as well as the lives and livelihoods of those who depend on them. These risks can act as multipliers for one another and hasten highly challenging outcomes. In short, organic adaption is no longer sufficient. At the same time, however, this situation presents a real opportunity. By carefully embedding climate risk considerations in the natural cycle of upgrades to existing systems or the creation of new ones, the world can adapt to rising risks in a more deliberate way and, likely, at a lower total cost.

The third implication is that, as with the transition to a net-zero economy, adaptation requires a systemic view to support local, national, and global efforts. That systemic view is the focus of this report. The question we are aiming to answer is what is an end-to-end framework for all the elements that must come together to enable the type of systemic change that adaptation requires. The report does not contend that all concerned would need to focus equally and at all times on all the elements of such a framework, but rather that the framework would allow the private, public, and social sectors to ensure that they are designing and implementing comprehensive (and therefore effective) adaptation strategies while diagnosing the challenges hindering progress and determining where collaboration is needed.

We undertook a similar exercise for the net-zero transition in a 2021 article, “Solving the net-zero equation: Nine requirements for a more orderly transition,” which highlighted nine requirements divided among three broad categories: physical building blocks; economic and societal adjustments; and governance, institutions, and commitments. Our aim was both to describe all the elements needed to mitigate climate change and to emphasize that they must come together in a connected way. Indeed, just as the impact of climate change is systemic, so too must be the approach to the net-zero transition. There are links among funding needs, technological innovation, standards and institutions, and mechanisms to address the transition’s regressive effects, to name a few, and their mutual influences and impacts need to be well-understood to enable effective action.

This report aims to do the same for adaptation. The difference in context is that the thinking about adaptation is much more nascent, so the gaps are even more pronounced. In that spirit, we propose a framework of ten fundamental requirements for fostering local and global adaptation efforts in the most effective and orderly way possible (see sidebar “Summary of the ten requirements”).

As private- and public-sector actors consider this framework, it is important for them to note that not all parts of the world will be equally exposed to rising risks during this decade. Even parts of the world that are exposed may not face equally severe risks. Nonetheless, it is important for all countries and regions to use this time as an opportunity to deploy the necessary near-term adaptation measures, to embed adaptation considerations into near-term decisions that have long-lived consequences (for example, designing enduring infrastructure assets that can also withstand future risks), and, finally, to build the capabilities to make the appropriate adaptation decisions over the longer term.

The progress to date

Some initial progress has been made on more deliberate adaptation. In the public sector, at least 84 percent of the 198 parties (197 sovereign states plus the European Union) to the United Nations Framework Convention on Climate Change (UNFCC) have established at least some adaptation plans, strategies, laws, and policies. Further, even some countries with no national plan, such as India and the United States, have state-specific plans in some instances.

Yet most of the existing adaptation plans do not account for the level of risk they deem acceptable, the warming level to which they plan to adapt, the specific risks they expect at that level of warming, the adaptation levers they will apply to manage those risks, the limits to what proposed adaptation levers can achieve, and the total cost of adaptation. Only the most advanced players across sectors and geographies have started thinking about this. Beyond the need for planning, the 2022 United Nations Environment Program (UNEP) Adaptation Gap Report emphasizes that incorporating risk thinking into strategy, providing the necessary financing, and acting to adapt to the new realities of climate are also all lagging behind what is needed.

A framework for scaling global adaptation efforts

At the highest level, we see four main categories of adaptation requirements:

1. A climate risk management mindset: building a deep understanding of existing risks and how they are expected to evolve, as well as setting explicit risk preferences and tolerances—all aided by the data and information systems needed to support decision-making.
2. Technological and behavioral adaptation levers: having the solutions, both technological and behavioral, to fulfill current and future adaptation requirements and ensuring that these solutions are widely accessible—in other words, developing the supply chains and securing the resources that would facilitate their deployment.
3. Economic and societal adjustments: having the financing needed to deploy adaptation solutions; the effective recognition, distribution, and pricing of risk; and support for the communities most vulnerable to it.
4. Governance, institutional support, and commitment: having the institutions, policies, awareness, and community and leadership support needed to promote adaptation.

Specifically, the report identifies ten key requirements across the four categories (Exhibit 1). What falls under each of these requirements is not static and must constantly be reexamined and addressed in light of both evolving risks and progress made.

A climate risk management mindset

Adapting to climate change requires organizations and entities to develop the two critical elements of the climate risk management mindset: a granular understanding of evolving physical risks, and a deep understanding of risk preferences and adaptation trade-offs.

1. A granular understanding of evolving physical risk and its implications under different future climate scenarios. Successful adaptation entails a deep understanding of the physical hazards and their immediate and higher-order effects. Community leaders would need to understand which risks might affect their communities and how these can play out over time. Businesses would have to consider physical risks to their buildings, production centers, operations, and supply chains. Both businesses and communities would have to understand the forms of physical climate risk that their assets face today and how they could be exposed to risks tomorrow (Exhibit 2). Further, successful adaptation requires all parties concerned to continually refresh their understanding of the evolving physical risks. As new data and insights show how warming occurs and where hazards are multiplying, the ongoing ability to assess this data and draw its implications will be critical.

However, climate data is complex. As our 2020 report Climate risk and response: Physical hazards and socioeconomic impacts emphasizes, physical climate risks have a number of key attributes: they are increasing, spatial in nature, nonstationary in their distribution, nonlinear in their evolution, have important knock-on impacts, affect economies and the planet systemically, and have regressive socioeconomic effects., McKinsey Global Institute, January 16, 2020. These attributes make these risks more difficult to apprehend and act upon and create a need for transparent, accessible climate data to inform adaptation and decision-making.

2. Forming an understanding of the value at risk as clearly as possible by translating the physical risks into possible impacts across a set of scenarios, including direct damage to buildings and assets, as well as impacts on natural and human resources. Clear methodologies and standards can help ensure a consistent framework for evaluating these risks.
3. Evaluating higher-order knock-on impacts, beyond direct ones. A robust understanding of risk implications would need to include the knock-on effects for communities and the supply chain, as well as interactions with the broader economy. This task is intrinsically difficult, since in many cases higher-order impacts are likely to dwarf the immediate ones in magnitude but remain much harder to quantify. This kind of assessment may be beyond the capabilities of many organizations and communities, but getting started by assessing the impact qualitatively could help them make the right initial adaptation decisions.

For organizations and communities alike, understanding the direct impacts of climate on their most critical assets and operations is the opening step. Often, this would first involve making a qualitative assessment of an organization’s asset footprint, overlaid against climate data, to understand the nature of the exposure to rising hazards and get a rough sense of their magnitude. Some movement in this direction can already be seen, largely as a result of voluntary risk disclosures requested by the global financial sector.

For example, according to the Taskforce for Climate-related Financial Disclosures (TCFD), nearly 80 percent of 1,400 companies surveyed in 2022 voluntarily disclosed their level of climate risk in line with at least one of the 11 recommended disclosures put forward by the TCFD. Financial institutions generally appear to be further along: 50 percent of asset managers and 75 percent of asset owners have reported in line with at least five of the 11 recommended disclosures. In some countries and jurisdictions, including the United Kingdom and the European Union, disclosure of climate risk is required by law for publicly traded companies. Moreover, certain financial regulators (for example, the Bank of England, the Hong Kong Monetary Authority, and the US Federal Reserve) have begun conducting preliminary climate risk stress tests.

Such disclosures provide one mechanism for transparency about physical risks and their implications. Nonetheless, effective adaptation will require more data, more standards, and more education to support decision-making.

2. A deep understanding of risk preferences and adaptation trade-offs. Setting explicit risk preferences is the foundation of any robust adaptation plan. Organizations and communities must decide which levels and types of risk are acceptable (and over what time frame) based on the tolerances of the assets and/or systems for which one is responsible, and the outcomes one wishes to deliver through their use. An individual business, community, or organization can choose to have a higher or lower risk preference and would need to continually reassess its preferences over time as the climate or the environment evolves, new data becomes available, or the overall strategy and societal acceptance change. These risk preferences would then help determine where and how to adapt. For example, one organization might prefer to protect its facilities from all flooding, while another might accept a water level rise of up to a meter, given the way its buildings are designed. Such a determination is, by nature, not a one-time effort but would have to be reexamined regularly over time.

These risk preferences must be set in the context of their opportunity cost. Given the reality of limited resources, stakeholders need to consider how much they can afford to spend on adapting to future risks while also continuing to invest sufficiently in both mitigation efforts and growth.

A robust adaptation plan begins with the level of global temperature increase a given organization or community is preparing for, as well as the risks its developers think the entity must adapt to and why. The developers of such a plan would also have to consider how it affects mitigation and growth targets, both positively (by enabling growth) and negatively (by accepting risk and reducing available resources). Decisions have long lifetimes—for example, the building of infrastructure assets such as bridges or drainage systems must carefully account for a range of future climate scenarios. Finally, as we have stated before, this process could be informed by a thorough understanding of the limits to adaptation.

The public and private sectors still have a lot of work ahead to meet this requirement at a global level. In the public sector, over one-third of the 198 signatories to the United Nations Framework Convention on Climate Change (UNFCCC) have set quantified and time-bound adaptation targets, up from one-quarter in 2018. However, the majority of these targets are not explicitly tied to the risks they aim to address and the outcomes they are intended to achieve. They generally focus on processes and deployment actions—for instance, increasing forest cover, mobilizing workers for climate change adaptation, or designating coastal and marine areas for protection.

As for the private sector, its efforts are equally nascent. In 2022, only 9 percent of reporting companies considered specific warming levels in their climate risk disclosures, and only 3 to 4 percent considered specific warming levels greater than 2°C, according to the TCFD. For both benchmarks, the UNEP Adaptation Gap Report 2022 notes mixed progress in identifying linkages between adaptation and other priorities, such as mitigation: some adaptation plans simply note potential co-benefits or maladaptation impacts; others incorporate these factors into their plans in preliminary ways.

Technological, physical, and behavioral adaptation levers

Adaptation requires the availability of technological and behavioral levers at the right scale, as well as a broad acceptance of the need for behavioral adaptation levers.

3. The availability of technological and physical adaptations to physical risks. The identification and development of effective technological and physical levers for adapting to climate change will be necessary, along with their widespread, efficient, and cost-effective production and deployment. Such levers include:

1. hardening or fortifying physical assets, as well as building defenses—for example, erecting seawalls or hardening power plants and placing transmission lines underground
2. controlling specific climate conditions by using technologies such as air-conditioning for humans or climate-controlled greenhouses for specific plants
3. providing advanced warning or monitoring of climate hazards through technologies such as heatwave-prediction systems
4. managing crisis responses by deploying emergency generators, developing search and rescue technology, and adapting the healthcare system to better manage acute climate hazards

To deploy these tools effectively, organizations must understand the limits of the risk to which a given tool can help them adapt, the interactions it could have with ongoing economic development or mitigation efforts, and the risk of unintended consequences or maladaptive impacts. Some responses, such as planting mangroves that act both as a physical barrier to storm surges and as carbon sinks, are synergistic with mitigation technologies. However, other important technologies could have a negative impact on the progress of mitigation—for example, air-conditioning that substantially increases energy demand and leaking coolants, or energy-intensive desalination plants that release large volumes of potentially damaging brine into the water systems from which they draw.

The good news is that many beneficial technologies are available today in some form because climate change is not introducing new classes of hazards but instead amplifying or intensifying existing ones that many parts of the world have already faced. In most (but not all) cases, the availability of these technologies probably would not require further innovation or raise concerns about supply chains, since those supply chains already exist. Moreover, several measures have co-benefits and are relatively low in cost. For example, nature-based solutions, such as planting trees in built-up areas to provide natural cooling through the provision of shade and water vapor, can offer low-tech, low-cost, and—a very important point—low-carbon solutions to these problems. However, adaptation at scale would also require addressing four challenges over time and continually applying the climate risk management mindset described above as risks evolve.

First, while most of the necessary technologies exist, the skill and time required to produce and deploy them will need to be brought down to improve their viability. For example, a recent study that took development trajectories into account estimates that by 2040 Brazil, India, Indonesia, and Mexico—which are among the countries most affected by heat stress—will collectively have up to 100 million families (about 500 million people) who cannot afford air-conditioning. A similar study looking at the cost feasibility of desalination found that it is currently affordable in only 34 of 140 countries under consideration, a number that would increase to only 77 by 2050 under current development trajectories.

Second, important technologies with a large maladaptive potential (such as air-conditioning and desalination) would need to be improved to reduce their negative impact on the climate. This could be done by reducing the carbon intensity of the power grids that feed those technologies and by reducing the impact of their waste products: brine and coolant leaks.

Third, the deployment of solutions with long lifetimes (for example, seawalls) would need to be carefully managed, as they might have to be designed to withstand not just current risks but also uncertain future ones.

Fourth, in some instances innovation will still be needed. If critical adaptation solutions have negative implications for mitigation efforts—for example, the production of concrete in the context of hardening and protecting assets—suitable low-emission alternatives that can compete in effectiveness, cost, and availability must be developed quickly.

4. Acceptance of behavioral interventions for adapting to physical risks. Along with the technological levers, behavioral interventions at an individual, community, corporate, state, or national level provide a cost-effective way to help reduce specific climate risks. Adoption of behavioral interventions will, in some cases, require populations to accept perceptible changes in behavior or lifestyles, since these changes may affect societal preferences and ways of life. In other cases, acceptance of behavioral changes requires additional costs—for instance, through redundancy (such as holding additional inventory).

These levers could include solutions such as:

1. building redundancy and buffers into systems—for example, by adjusting food storage levels, creating demand response systems that help people use less power during peak usage, and increasing battery capacity
2. diversifying—for instance, by encouraging a broader mix of industrial activity to reduce dependency on outdoor work or by sourcing supplies from a larger number of geographically disparate producers
3. altering operations and individual behavior—say, by adjusting the planting season for crops or shifting working hours to avoid the hottest parts of the day
4. reducing exposure to hazards—for example, through managed retreat (moving assets out of high-risk areas) or avoiding building new assets in those areas

Throughout history, many behavioral adaptation measures have been widely deployed to deal with small year-to-year natural fluctuations in climate and with natural differences in climate between the different geographies where a common industry might operate. Even relatively common strategies would have to be applied in new ways to account for evolving risks. For example, one widely used practice for exposed systems is to build redundancy or buffers, such as holding excess inventory to protect supply chains from disruption. But buffers are generally based on historical data—now a poor guide to future risk. Other strategies are less mature: for example, factoring climate risk into decisions for locating new assets. Enormous amounts of capital continue to be invested in high-risk areas or regions; in a world of rising risks, careful consideration should be given to deciding where to place new assets.

As with technological levers, effective behavioral adaptation would require developing a climate risk management mindset: acquiring the necessary data and using it to build an accurate understanding of the future evolution of relevant climate risks, at both the asset and systems levels. Effective behavioral adaptation would, in some instances, also require larger changes: shifting working hours, for example, could require rethinking mass-transit systems, and diversifying supplier networks might involve building new relationships and capabilities. Behavioral adaptation will also require effective engagement with the affected communities, particularly for measures to reduce exposure. Decision makers need the ability to communicate, collaborate, and engage effectively with the communities, employees, or customers that would ultimately adopt the behavioral changes and bear their challenges and costs. (We discuss this further in the ninth requirement.)

The availability of economic and societal adjustments

The third set of requirements for adapting to climate change are the economic and social ones: effective capital allocation and financing structures, risk pricing and transfer mechanisms, and mechanisms to compensate vulnerable states, communities, and institutions.

5. Effective capital allocation and financing structures. Economic and societal adjustments require two broad sets of actions: developing estimates, as accurate as possible, of the financing needs and fostering the financial innovation required to ensure the flow of public and private capital to what, in many instances, have been traditionally public activities.

In the ideal case, estimating the cost of financing would require six steps: building a granular understanding of the risks under different warming scenarios, determining the level of acceptable risk, identifying available technological and behavioral adaptation levers, constructing the conceptual equivalent of a marginal-abatement-cost (MAC) curve, ranking available adaptation levers by impact and cost, and using that information to organize a comprehensive lever-by-lever strategy. The least costly and most effective levers may, however, have unintended maladaptive consequences. Adaptation cost curves, therefore, cannot be applied blindly. While the ideal case entails all the steps mentioned above, in practice a simple prioritization of available and feasible adaptation levers can be a good starting point.

As for meeting these financing needs, public funds everywhere are already stretched, so incentives would be needed to increase the flow of private capital into adaptation activities. Since private financing generally requires direct returns, and adaptation levers rarely generate a direct revenue stream, financial innovation is required.

As noted earlier, most public and private adaptation plans (and therefore cost estimates) are currently underdeveloped. There are some exceptions. The Bangladesh National Adaptation Plan, covering the years from 2023 to 2050, includes detailed cost estimates. The plan identifies 113 specific interventions (organized into short-, medium-, and long-term approaches) that the country could deploy in 11 high-risk climate regions. Built into the plan is a five-year reevaluation process—a recognition of the highly uncertain nature of climate hazards and socioeconomic vulnerability, and an acknowledgement that adaptation efforts may need to be scaled up or down (or adjusted in nature) as time passes. The cost of the total plan has been estimated, on an intervention-by-intervention basis, at roughly $230 billion. Three-quarters of that amount would be needed by 2040.

Attracting private capital to help meet funding needs would require developments on three fronts. The first concerns the adaptation of the kind of assets that are frequently owned by public–private partnerships: power grids, transport networks such as roads and railways, and water treatment and management infrastructure. Here, improved regulation could help implement adaptation measures through blended public–private finance requirements.

Second, private-sector actors need to increase the level of adaptation spending projected in their capital planning processes. This step is currently hindered, in many geographies, not only by a misunderstanding of the possible degree of risk but also by uncertainty about the extent to which public funding could or would act as a backstop for damage to private property.

Finally, new mechanisms for using private finance to support adaptation in the public sector should probably be developed by leveraging ideas such as bundled adaptation and mitigation projects, which share revenues and profits from mitigation levers to facilitate the implementation of adaptation levers. Such mechanisms could also involve extending the idea of carbon credits to create vulnerability reduction credits: exchangeable certificates confirming that a project has achieved a demonstrable reduction in climate risk though adaptation measures. In other words, the costs of adaptation would increasingly have to be recognized not as immediate revenue opportunities but as the cost of doing business going forward.

6. Effective risk pricing and transfer mechanisms. Today, much of the risk management for natural disasters occurs through risk transfer. Insurance is the primary mechanism for transferring risk from one asset holder, who may not have the individual resources to accept it, to many, who collectively do. In many countries, governments help protect homes and businesses from physical events such as fires, floods, and hurricanes. Often, people insure their homes instead of investing in specific adaptation measures (for example, reinforcing buildings) to eliminate or reduce risks. Factoring rising climate risk into insurance premiums could, in principle, help transfer risks effectively, both by better protecting the insured and by helping insurance markets to go on functioning effectively. More broadly, appropriately pricing risks means making the stakeholder community aware of their full magnitude, so capital allocation decisions can be made effectively. Home buyers, for instance, would be made fully aware of the level of flood risk they would face before making new purchases.

However, this approach presents a number of challenges. Today, markets struggle to price future climate risk effectively for several reasons. To begin, doing so requires the competencies and skills described in the first requirement above: building a deep understanding of physical climate risk. But these skills are still not broadly disseminated. In addition, and perhaps more important, translating physical impacts into economic ones is a nascent field of study both in academia and among practitioners. The disclosure of these risks would have to increase so that this information was available to institutions that set prices, as discussed in requirement one.

Once these risks were built into pricing mechanisms, other challenges could arise. When climate risk is appropriately priced into future claims projections, premiums are likely to rise in high-risk areas, making risk transfer unaffordable for some consumers. In certain cases, difficult-to-price risks can make some areas basically uninsurable in the eyes of insurance companies. Present levels of risk are already having a measurable impact on both the increase in disaster costs and the lower availability of insurance markets in the world’s hardest-hit regions. For example, over the past several years the property insurance market along the Gulf Coast of the United States has been severely affected by an increase in the intensity of hurricanes and coastal flooding, so dozens of insurers have declared insolvency and hundreds of thousands of homeowner policies have been canceled. Two of the largest insurance companies have ceased to offer home insurance in California as a result of claims from fires.

Three shifts to insurance products and practices can improve effective risk pricing and transfer mechanisms. The first concerns the role of government in the insurance industry. Today, a growing number of risks are uninsured, and local and national governments are already acting as insurers of last resort, providing reconstruction costs after major disasters. This practice could quickly become untenable in a world of increasing risk. Consequently, measures like blended public–private programs to encourage the maintenance or expansion of insurance markets could be considered. One example (from another field) is the Terrorism Risk Insurance Act (TRIA) in the United States. In the United Kingdom, Flood Re levies annual fees from all UK-based home insurance providers and uses the pooled funds to reimburse any insurer facing a valid claim for flooding damages. Regulatory changes such as raising caps on insurance premiums or requiring specific adaptation actions to qualify for insurance could also help maintain a functioning risk finance system.

Second, reinsurance markets, where insurance companies purchase coverage for their own exposures to catastrophic events, could play a role by providing products such as catastrophe bonds to better support direct insurance markets and to continue supporting public and private insurance schemes in high-risk regions. Third, some insurance policy designs provide for higher premiums, higher deductibles, greater resilience-related incentives, and (potentially) shifts from indemnity toward alternate structures. These moves could simultaneously reduce the cost of insurance and change the nature of the risks being addressed. For example, parametric insurance allows systemic risk to be insured by providing for the payment of a fixed sum immediately upon the occurrence of a given event (such as a flood or a fire), regardless of whether or not damage occurs. This approach can provide cost certainty, allow the accurate setting of premiums, and reduce operating costs for insurance providers.

The impacts to vulnerable populations should also be carefully considered, since they are the groups most likely to be uninsured and probably can’t bear higher premiums. One option would be to ensure that premiums effectively reflect the magnitude of risk while other forms of support (for example, transfer programs) help vulnerable stakeholders to afford higher premiums. Any compensating mechanisms must, however, be thoroughly assessed to avoid creating moral hazard by subsidizing less risk-aware behavior—for example, continuing to build new assets in especially high-risk locations.

7. Compensating mechanisms for vulnerable states, communities, and institutions. The continued warming of our planet is likely to affect the poorest and least-developed nations and regions disproportionately. These parts of the world would face the most disruptive physical impacts, since by and large they are situated in geographies where climate hazards are already closest to critical physical and physiological thresholds. Low-income countries would also endure the largest increases in economic exposure, as many of them depend on the output of the most climate-affected sectors, such as fossil fuels or agriculture., McKinsey Global Institute, January 16, 2020. Such regions also appear to have the least adaptive capacity. Even in higher-income regions of the world, lower-income households will be most challenged to raise the money needed to adapt to a changing climate.

Total public climate-related bilateral flows, for both mitigation and adaptation, to developing countries reached just $33 billion in 2020, according to UNEP. Of this, only 36 percent ($12 billion) was earmarked specifically for adaptation, and an additional 24 percent was tagged as cross-cutting.

A key dimension of adaptation would therefore involve creating mechanisms to direct finance flows toward the most vulnerable parts of the world and to support adaptation for vulnerable communities everywhere. If debt can finance such flows, there would also be an imperative to reduce the debt total of climate aid. High costs of capital increase the indebtedness of developing nations and of lower-income communities or regions within developed ones, reducing their long-term fiscal stability and thus their resiliency in the face of continued climate change. Today, roughly 70 percent of climate finance flows from the Global North to the Global South take the form of debt financing, and only roughly 10 percent of it consists of low-cost or concessional loans. In 2020, developing nations spent $400 billion on total debt repayments—almost four times the volume of climate financing offered.

Governance, institutions, and commitments

The final, and perhaps the most critical, requirements are effective governing institutions and policies, community awareness and engagement, and commitment by and among leaders in the public and private sectors, both globally and locally.

8. Effective governing institutions and policies. Effective governing institutions and policies are central to enabling adaptation. They can help forge collective ambitions, set standards, and share best practices. Such institutions—at the local, national, or global level—have an opportunity to ensure access to data and education on climate adaptation (the first and second requirements), to set standards for the consistent development and deployment of plans and to provide mechanisms for effective risk transfer and funding (the fifth and sixth requirements), and to engage effectively with and support affected communities (the seventh requirement).

The UNFCCC, for instance, has developed standards and requirements for national adaptation plans for developing nations, providing them with funding and technical assistance, while the European Union has required national plans from each of its member nations. Similarly, advances in the private sector are linked, at least in part, to existing or forthcoming regulations—for instance, a proposed US Securities and Exchange Commission rule.

Standard setting bodies could update their existing standards and policies to include forward-looking risk estimates. They could also set standards for independent climate risk measurement, reporting, and adaptation action by institutions or communities. For example, California’s utilities regulator is strengthening its resource-adequacy modeling and planning by requiring electric utilities to procure enough power generation capacity to cope with extreme events, such as the heat wave that led to rolling outages in August 2020. In Texas, a recent law (HB2555) allows utilities to develop and acquire additional capital funding for extreme-weather resiliency plans.

In addition, standard setting plays an important role not only in encouraging adaptation measures but also in ensuring that they do not lead to maladaptation. Standards could, for example, require air-conditioning units to operate at specific levels of energy efficiency and mandate the use of coolants with a relatively low global-warming potential. More broadly, governing institutions will also have to ensure that the voices of affected communities are included in decision-making.

The primary impediments to the development of effective public-sector institutions and policies are serious. For one thing, governing institutions already face diverse challenges. These issues range from geopolitical disruptions created by international conflicts and tensions (which are becoming longer and more intense than they have been during the past five decades) to macroeconomic turbulence (for instance, high levels of indebtedness, inflation, and unemployment) to public-health challenges (including post-COVID healthcare burdens and the increasing age and illness of the global population). Moving forward, decision-makers responsible for critical infrastructure (such as power, water, and transport) and for civil standards (including building codes and the regulation of the financial and insurance sectors) would need to search for ways to combine climate adaptation with thoughtful efforts to address other pressing priorities. Entirely new institutions or policies may also be needed to better guide and coordinate adaptation efforts.

9. Community awareness and engagement. Behavioral adaptation and changes in risk tolerance will probably play an outsized role in managing physical climate risk. The success of any adaptation strategy would depend on whether the communities that participate in (or are affected by) it are willing to act. Public and private actors whose decisions affect communities or other large groups of people might consider three principles when they develop engagement strategies: structuring adaptation proposals around the interests of those affected, closely consulting the affected groups during the planning process, and actively involving them in deployment or implementation.

Public and private actors that fail to make community engagement a central component of their adaptation strategies probably won’t achieve their goals, given the substantial existing habits and interests involved in any major societal change. They also run a high risk of promoting maladaptation: they might, for example, use suboptimal adaptation levers because they lack on-the-ground knowledge and don’t understand the deeper context of the participating communities. Or the deployment of those levers might be unjust as the benefits of an adaption intervention would accrue to some groups at the expense of others.

A successful example of community engagement has been cited in Zimbabwe, where more than 500 urban-poor collectives operate savings-based loan funds to finance local development and adaptation. These funds are owned and operated by the communities they serve. Built on a combination of local savings, government financing, and philanthropic donations, the funds can respond to climate emergencies by rapidly extending loans with fixed, low-interest rates that help individual communities or community members to finance their own adaptation and recovery priorities. Although this model increases indebtedness, the community owns the debt, and the projects are chosen at the local level—a clear example of decentralized decision-making at the lowest appropriate level of authority. Integrating communities directly into adaptation planning and execution processes (that is, locally led adaptation) is an emerging practice, with many other early examples around the world. However, public and private stakeholders that want to work more closely with the communities where they operate (or for which they are responsible) face two important challenges.

First, community organizations would need to be fully informed about not only the nature of the climate risk they face but also the adaptation options available to them, the way adaptation serves their interests, and the pros and cons of pursuing specific approaches. Those involved would have to acquire the necessary knowledge and develop their communication and engagement skills to transmit knowledge effectively and inspire communities to participate in an adaptation dialogue in the first place.

Second, though decentralizing decision-making has benefits, it also entails a risk of maladaptation if perverse incentives guide community priorities. For example, in some cases community-led adaptation dialogues have tried to protect near-term housing prices by removing important adaptation options from consideration and planning processes.

10. Commitment by and among public- and private-sector leaders, locally and globally. Effective adaptation would require coordinated leadership from participants across sectors, geographies, and times. Commitment will be needed from both the public and the private sector. Public-sector leaders would need the capabilities to develop coherent plans based on transparently communicated risk preferences, which should be updated regularly. In parallel, private-sector leaders would have to consider what they must do, across the value chain, to maintain or adjust their existing business models. The financial sector in particular would need to find opportunities to finance adaptation and develop novel ways to transfer risk. Leaders would have to act together, as they must in the net-zero transition, to implement the physical building blocks and to secure the economic and societal adjustments needed for successful adaptation.

That kind of cooperation will take several forms. In the public sector, different groups and entities would need to work together to solve the challenges: for example, adapting to higher temperatures in a community would require coordination among those responsible for roads and infrastructure, public health, and water, to name a few parties. Similarly, coordination may be needed across local and national governments. Public and private entities would also have to coordinate their activities to ensure that the right technologies, funding, and risk transfer mechanisms were available and to deploy adaptation solutions. In addition, global coordination and commitment will be required—for example, to direct financial flows to the parts of the world most in need of adaptation and to develop and share best practices. Public–private philanthropic partnerships have an opportunity to solidify and enable that kind of cooperation and commitment.

Commitment across geographies is not the only issue; public- and private-sector leaders will also need to ensure continuity of commitment over time. Today, many leaders think they are being asked to plan and act over impractically long time horizons. Yet in some parts of the world, climate adaptation is required in the near term. What’s more, decisions made today can have long lifetimes—for example, decisions by city governments on where to build new infrastructure or by private-sector companies on where to build new factories. As a result, it is vital for stakeholders to consider the role of adaptation in their day-to-day decision-making.

An agenda for leaders

Sustained action for adaptation would be needed across all the ten dimensions described above. As a starting point, decision-makers should consider the following:

Conducting climate risk assessments to determine the conditions that could lead to losses. First, address key questions, such as what level of loss is associated with different warming scenarios (1.5°C, 2°C, etc.), and how soon to expect each level of warming. Perform an effective analysis incorporating nonlinear damage curves and probabilistic event analysis instead of using an overly simplified approach that depends on changes in averages and damage curves.

Seeking out the limits of adaptation achievable for the specific risks you face. Do not assume that 100 percent of climate risk can be adapted or transferred away. Consider the possibility that limiting risk would require fundamental changes—for example, to your asset and location strategy.

Communicating your findings widely. To achieve the necessary levels of awareness and collaboration, encourage the free flow of information about the resources available and the risks and challenges you may be facing under various climate scenarios.

Taking no-regrets adaptation actions today, while you still have the runway to do so. Collaborate with other leaders to incorporate future-looking partnerships. Act as a good steward and invest now, so that future leaders have the tools they need to operate effectively in the new climate regimes they will surely face.