Private equity investors are missing out on hundreds of billions of dollars in potential investments in climate adaptation and resilience (Climate A&R ) globally, say BCG and Temasek in a new report.
Investors have not been able to capitalise on opportunities in the sector, owing mainly to the difficulties in identifying assets or businesses that can generate attractive returns.
The report’s authors note that potential investments in this space tend to be either early-stage, pure-play businesses that carry higher technology and market risks, or a small unit within a large diversified business such as an industrial or infrastructure asset.
Nevertheless, there is growing interest in this area, as indicated by a number of recent launches of funds or strategies dedicated to climate adaptation and resilience. This includes BlueOrchard Finance’s 2023-vintage InsuResilience Investment PE Fund II, which aims to invest $100 million across Asia, Africa and Latin America in agritech and food systems.
The report identified a number of areas as the most attractive, based on public and private sector investment momentum, and benefit-cost ratios. These include energy distribution; urban and industrial water efficiency; climate analytics and hazard warning systems; cooling; climate-resilient building materials; and climate-adapted agriculture.
Climate analytics, in particular, has been attractive to private capital. Traditional private equity players have picked up on the hazard warning segment, with its proven business model and stable cash flows.
Meanwhile, growth and venture capital investors, as well as credit rating and data companies, have been keen on start-ups that have built data models or translated climate data into “actionable insights.” For instance, in 2022 S&P acquired a company, The Climate Service, that quantifies climate risks. TPG Rise invested $100 million in Climavision, a weather forecasting company.
However, as the impact of climate change varies by geography, so do the business models that address them.
The report noted “investors can invest in Climate A&R companies to expand their markets geographically, increase cross-selling, and/or execute roll-ups, acquiring and merging companies in the same sector.
The localised nature of Climate A&R markets allows investors to enter at lower valuations before market expansion can be fully priced in.”
Advanced metering, for instance, is projected to grow at a compounded annual rate of 8-10% until 2030, and generate a pre-tax margin of 25% to 30%, and are attractive to growth and buyout funds, the report said.
The report noted that financing for climate adaptation and resilience projects currently stands at around $76 billion a year, with most of it coming from the public sector.
According to the 2024 UN Adaptation Gap Report, countries in the Global South will need climate adaptation and resilience-related investments of between $215 billion and $387 billion a year from 2025 to 2030. Accounting for the developed countries, total expenditure in the industry must rise globally to between $0.5 trillion and $1.3 trillion a year by 2030.
