Repricing Climate Risk: Why Investors Must Fund Both Adaptation and Mitigation

The persistent climate finance gap

The latest climate conference in 2025 (COP30) did not lay the groundwork for a Paris-aligned decarbonization pathway. Although the “electrotech revolution” is moving ahead globally at an accelerating pace, substantial regulatory measures and additional levels of public funding and international cooperation are still needed in order to stabilize the Earth’s climate system at “well below 2C” by the end of this century. While the true scale of cumulative climate damages and losses exceeds the scale of investments needed for a rapid and just transition many times over, this basic fact remains underappreciated in public discourse. As a result, climate mitigation efforts remain severely underfunded.

The unmet need for investments in necessary adaptation and resilience

Owing to the insufficient level of climate action thus far, a significant share of future climate-related losses and damages has become unavoidable. As a result, additional investments in climate adaptation and resilience measures have become necessary just to maintain the capacity of economies and societies to continue and accelerate the current pace of fossil fuel displacement. Yet, most existing infrastructure assets, buildings, supply chains, and trade routes were designed based on outdated engineering standards informed by past weather extremes. Increasingly uninsurable real estate properties and related corporate assets indicate significant stranded asset risk. Although reliable information about geospatial climate risks ought to be a public service, it remains difficult to access, in part because building owners are lobbying against improved risk transparency to protect current overvaluations. As future physical climate strains become increasingly likely to exceed time-tested safety tolerances, many human societies that have failed to invest in improved climate adaptation and resilience are poorly prepared.

Why conventional damage models have underestimated climate risk

An important root cause for the funding gaps that affect both climate mitigation and climate adaptation measures is a grave underestimation of the true scale of climate-related losses and damages by neoclassical economists like William Nordhaus or Richard Tol. As a recent report, “Recalibrating Climate Risk” shows, not only was their damage function design based on assumptions that have proven inadequate, but they also failed to consider indirect and systemic climate effects, such as food system productivity losses, migration pressures, increasing risks of armed conflicts and societal destabilization, and climate tipping points that, for instance, accelerate sea level rise, ocean acidification, or a weakening of the Atlantic meridional overturning circulation (AMOC). This underestimation has had material consequences for policy and capital allocation, as decision makers and the public were left with an overly optimistic risk assessment. Even without fully accounting for indirect and systemic effects, improved and science-aligned damage models project orders of magnitude higher “business as usual”-related welfare losses and social costs of carbon exceeding 1300 USD/ton, for instance.

The need to carefully manage adaptation and resilience-related impact risks

The current outlook, in which the need for improved climate adaptation and resilience will become increasingly apparent over time, demands careful consideration. On the one hand, there is a significant “derailment risk”: the risk that insufficient adaptation derails climate mitigation efforts directly or indirectly. For instance, the rationale for more effective climate mitigation could be weakened by political narratives of a false trade-off between mitigation and (necessary) adaptation, suggesting societies must choose one or the other although additional funding for both causes is economically, ethically, and scientifically well-justified. On the other hand, there is an opportunity to use the increasingly apparent need for climate adaptation to underscore the scale of the climate challenge (“strategic adaptation”) and to highlight that only effective mitigation addresses the root cause of climate damages and losses. Managing investments in adaptation and resilience effectively requires a delicate balance:

Financial institutions, policy makers, businesses and citizens have yet to fully internalize the fact that the extreme weather patterns of the past no longer predict those of the future. While only a fraction of potential climate damage has become unavoidable to date, the severity already exceeds what many market participants recognize. Understanding location-specific adaptation needs and identifying mispriced real estate and stranded asset risks requires forward-looking, science-based geospatial climate risk assessment – capabilities that specialized consultancies like our portfolio company GEO-NET provide, for instance. Critically, increased funding for climate adaptation and resilience must complement, not substitute, climate mitigation investment. Closing both funding gaps in climate mitigation and adaptation simultaneously is not only necessary to achieve the goals of the Paris Accord but is economically justified by the far greater scale of cumulative climate damage and losses that can still be prevented. For investors this creates a dual imperative: internalize physical climate risks in asset pricing while supporting strategic adaptation as a complement for climate mitigation.