Pietro Sette, Research Director
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Global bond markets have a tendency to view climate finance through the lens of decarbonisation. Renewable energy, electric transport, and green buildings dominate Green Bond issuance, offering measurable CO₂ savings and straightforward impact narratives. Yet as the planet warms and physical risks escalate, an equally, if not more urgent agenda is emerging: financing adaptation.
More than 1.8 billion people today live in high flood-risk areas. Climate-related disasters caused USD 550 billion in damages in 2024 alone. The World Health Organization estimates droughts are expanding across multiple continents, eroding agricultural productivity and threatening energy security.
The economic implications are not insignificant. The UN Environment Programme (UNEP) projects that developing countries will need USD 387 billion annually for adaptation by 2030, yet only USD 28 billion of international public finance flowed in 2022. This leaves an annual financing gap of nearly USD 360 billion. For investors, these numbers translate into material portfolio exposure. Flooding, drought, and heat stress can impair asset values, disrupt supply chains, and reduce sovereign credit quality. Inaction, the UNEP report notes, already costs more than financing the solutions.
What is apparent from our latest quarterly GSS Bond report, When Mitigation Falls Short: The Growing Need for Adaptation Finance, is that global capital flows remain heavily skewed toward mitigation. Adaptation, here, refers to assets that build resilience against floods, droughts, heat, and sea-level rises. Between 2018 and 2025, just 1.8% of Green, Social and Sustainability (GSS) Bond proceeds have been channelled towards adaptation projects.
Public institutions do nearly all the heavy lifting: 96% of adaptation-related issuance over the past five years has come from governments, development banks, or supranational entities. Private capital has yet to play a meaningful role.
Even where issuers include adaptation in their frameworks, follow-through is tenuous. We found that only 30% of bonds referencing adaptation in their pre-issuance documents ultimately allocate some capital to such projects. To put this into context, GSS Bond issuance totalled around USD 140 billion in Q3 2025, down slightly year-on-year. Yet most of that money is still going to mitigation: with adaptation receiving roughly 1 percent. Why the disparity? Adaptation projects are often local, smaller in scale, and slower to deliver measurable returns. They protect against losses rather than generate new cash flows, which makes them less intuitive for investors accustomed to energy-transition metrics. Quantifying their impact, for instance avoided flood damage or reduced water scarcity, remains difficult, as it is their linkage to financial returns.
For capital markets, adaptation finance is also risk management. Investors exposed to sovereigns, utilities or corporates vulnerable to physical climate impacts face growing tail risk. Rating agencies are increasingly factoring resilience into credit assessments, meaning adaptation spending today could avert downgrades tomorrow.
Adaptation investments, such as flood defences, water infrastructure, and resilient agriculture, can often offer stable, long-duration returns. They are natural assets for fixed-income investors seeking predictable cash flows, especially when supported by public co-financing or frameworks like the EU Green Bond Standard (EuGBS) and EU Taxonomy, which formally recognise adaptation as an eligible Environmental Objective.
There are some good examples of adaptation finance at work. Whilst not EuGBS, the Netherlands’ NWB Bank has issued EUR 10 billion in “Water Bonds” to finance flood protection and wastewater projects. Indonesia’s sovereign Green Bonds fund irrigation systems and coastal defences to safeguard agriculture and fisheries. Both cases show how adaptation can be structured within existing green-bond architectures, offering transparent use of proceeds and measurable outcomes.
Scaling adaptation finance will require a mix of public incentives, blended-finance mechanisms, and better data. Guarantees or first-loss tranches could attract private investors wary of local project risk. Standardised reporting and metrics would improve comparability and credibility. Metrics such as area of land protected, number of beneficiaries, or estimated damage reduction.
Regulatory frameworks also matter. The EU Taxonomy’s adaptation criteria, published in 2021, provide a foundation for classifying eligible activities, but implementation remains slow. Broader adoption of the EuGBS could accelerate transparency and investor confidence.
For asset managers, the opportunity lies in integrating physical-risk analytics into portfolio construction. Funds that tilt toward resilient infrastructure, water systems, or climate-proof agriculture can not only deliver impact but potentially outperform as physical risks materialise.
The choice facing investors should focus not on whether to finance adaptation, but how soon they do so. Resilience-building initiatives are not just investments in climate security, but investments in economic stability.
Adaptation finance is the next frontier of sustainable investment and a test of whether finance can evolve as fast as the climate is changing.
