The climate adaptation investment imperative

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In partnership with Equitix, LAPF Investments explores why climate adaptation is likely to become an increasingly important investment theme for local government pension schemes, and how investment in adaptation infrastructure can support resilient communities, essential services and long-term stable returns

The impact of climate volatility today

2026 has been a year of concerning climate change-related records. The year has seen a heatwave leading to the warmest June on record in Western Europe, following an exceptionally cold January, which saw Europe’s temperatures plummet to their lowest levels in 16 years.

The Global Forest Fire Information System (a tool managed by the European Earth Observation Programme) registered more than 160 million hectares affected by forest fire worldwide in the first five months of 2026, the highest figure for that period since data collection began in 2012¹.

In practical terms, the consequences to infrastructure have been clear. From low water levels on the River Rhine severely restricting inland shipping², high temperatures leading to the shutdown of French nuclear power stations³, and UK train operators introducing timetable changes and speed restrictions in response to track-related risks⁴, assets across a range of critical sectors have been affected.

While the range of estimates associated with the economic losses from extreme weather remains wide, there is near consensus across economic studies that climate change will negatively impact economic output⁵.

At a global level, the United Nations Global Assessment Report on Disaster Risk Reduction calculates that total costs associated with climate risk are now in excess of $2.29 trillion per year⁶.

In Europe, the European Environment Agency has observed a trend of economic losses increasing over time, with the period 2020 to 2024 experiencing four of the top five years of highest annual economic loss since 1980⁷.

And, from a UK perspective, studies completed by the Bank of England and the Grantham Research Institute estimate that the long-term impact of climate change could be in excess of -7% of GDP. The Bank of England estimates a -7.8% impact on GDP by 2050 under a 3.3°C warming scenario, while the Grantham Research Institute estimates a -7.4% impact by 2100 under a 3.9°C degrees scenario⁸.

From a risk mitigation perspective, local government pension schemes and other institutional investors with long-term investment horizons are increasingly interested in understanding the potential investment consequences arising under various climate scenarios.

Similarly, the opportunity to invest in these solutions increasingly aligns well with relevant long-term institutional investment objectives, particularly building portfolio resilience, delivering local impact and securing long-term stable cashflows.

The adaptation imperative: why mitigation alone is not enough

It is against this backdrop that the significance of climate change adaptation becomes clear.

While significant investment has been made to date into climate mitigation efforts, which seek to reduce greenhouse gas emissions, adaptation focuses on adjusting to the physical effects of climate change. Resilience is the outcome of resilience-building measures, ensuring assets and services continue to perform despite the changing and increasingly volatile climate.

As noted by the Intergovernmental Panel on Climate Change (IPCC), many of the observed extreme weather events are the result of ‘enhanced radiative forcing’, in which human-driven increases in greenhouse gases trap more heat in the atmosphere and create the global warming effect⁹.

It is only once net zero is reached globally that the pace of climate change is expected to slow. However, even then, global temperatures will continue to rise. And, despite the global level of investment in clean energy now being almost double that of the fossil fuel sectors, emissions are not being cut quickly enough¹⁰.

Current estimates project the world to be on a path that exceeds the 1.5°C target agreed under the Paris Agreement¹¹. With only 10% of global climate-related investment being made into adapting to a rapidly changing climate context, the urgency to address the investment gap in infrastructure resilience feels greater than ever.

From increasing water resilience, to upgrading cooling systems, and integrating climate-related risk insights into the management of infrastructure assets, climate adaptation is an important area for investors to be aware of.

Three reasons why this matters to LGPS investors: risk, return and place-based opportunity

While the events of 2026 so far may present a rather sobering picture of the state of the world today, it is clear that the need for new adaptation solutions and increased resilience in existing vital infrastructure is greater than ever.

First, there is growing opportunity to support an emerging pipeline of resilience-focused projects which demonstrate solid infrastructure asset class characteristics.
Second, adaptation must be integrated into the management of infrastructure to ensure the continued delivery of essential services and stable returns in a more volatile and unpredictable climate context.
Third, investment in infrastructure resilience is likely to facilitate clearly defined, place-based impact in line with increasing LGPS focus on delivering against local investment objectives.

As such, strengthening the case to explore climate adaptation as an investment theme is likely to offer benefits to both investors and local communities alike.

On a global basis, research conducted by the World Resources Institute (WRI) estimates that the economic internal rate of return (EIRR) of protective infrastructure schemes averages of around 25%¹². The EIRR is the discount rate at which the net present value of the economic benefits associated with an adaptation project equals the value of its economic costs.

While this is a helpful indicator of the broad societal and economic benefits derived from asset resilient measures and resilience programmes, it does not explain the cash flow profile of projects and the associated returns to the investor. As such, it is important to explore recent developments that are making adaptation investable for private institutional capital.

Making adaptation investable

For investors in climate mitigation, the revenue model has become well understood – infrastructure in sectors such as renewable energy generation provide a resource with clear demand that can generate a return to investors by selling green electrons through a variety of routes to market. These include power purchase agreements into the wholesale market on either a merchant basis, or with support from government subsidy to reduce price volatility exposure.

Investors access the market by identifying and investing in infrastructure which meet their risk-return appetite. Some investors favour stable yields, offered by models where revenue volatility is reduced via subsidy or long-term offtake agreements, while other investors may have greater risk tolerance and accept less revenue predictability in favour of potentially higher returns.

In comparison, the less mature market for climate adaptation investment requires careful thinking to make sense of how investors can achieve a return. However, as clearer models for investment start to be applied to such projects, the potential opportunity is becoming clearer for investors.

Haweswater Aqueduct Resilience Project (HARP)

The Haweswater Aqueduct Resilience Project (HARP) is one such example. Located in the Northwest of England, HARP is an innovative major infrastructure project involving the replacement of 110km of existing tunnelling that supplies drinking water from the Lake District to 2.5 million people living in and around Manchester.

The existing pipeline has been in operation since the 1950s and was identified by United Utilities as requiring major refurbishment in order to ensure security of supply for customers over the long term.

United Utilities adopted a Direct Procurement for Customers (DPC) model covering the design, construction, maintenance and financing of the £3 billion project.

HARP is the first project in the water sector to be delivered through the DPC model, which entails the selection of a ‘competitively appointed provider’ (CAP) to manage the project in a way that encourages better value for money, transparency and accountability. The water regulator has made competitive delivery the default delivery method for new programmes where whole-life total expenditure exceeds £200 million.

Risks are passed down to the supply chain through the CAP Agreement (CAPA), while clear expectations for project delivery are set out by United Utilities. From biodiversity net gain commitments to a carbon management plan, social value strategy and local supply chain development initiatives, the impact of projects such as HARP goes far beyond simply the delivery of an upgraded aqueduct system.

In essence, the DPC model draws on concepts that are already well understood in the Public Private Partnership (PPP) model and applies this to support much needed investment into critical water infrastructure.

In return for financing, designing, building, operating and maintaining water infrastructure, investors receive a unitary charge paid for by customers through their water bills.

Early investor involvement in DPC programmes is also attractive to investors, providing the opportunity to design optimal financing structures, identifying levers to de-risk, and designing an efficient programme for delivery alongside consortium and project partners.

Critically, Ofwat has specifically considered the importance of avoiding asset stranding risk, given the benefit schemes receive from long-term recovery mechanisms and their inherent purpose to overcome the challenges posed by physical climate change¹³.

The opportunity for further investment in similar programmes is expected to grow. On top of the four existing projects being competitively delivered – including HARP, Thames Tideway, Dwr Cymru’s Cwm Taf water treatment works and Portsmouth Water’s Havant Thicket reservoir – Ofwat accepted a portfolio of 30 major infrastructure schemes in its PR24 final determinations with a whole life Totex in excess of £50 billion, based on 2022-2023 prices¹⁴.

By combining the inherent criticality of underlying assets, clear impact to communities benefiting from increased long-term resilience to the effects of climate change, and a transparent revenue mechanism with capped liabilities, projects such as this create an interesting proposition for investors.

Beyond dedicated adaptation projects: building resilience across infrastructure portfolios

While resilience-focused programmes such as HARP are crucial components to furthering progress on climate adaptation, investors should also consider the importance of building resilience across their wider infrastructure portfolios.

During site preparations and construction of new infrastructure, hazards such as wildfire and extreme storm events can impact project delivery schedules due to dangerous working conditions and site access issues.

Operational power generation assets can also experience negative impacts from heat exposure due to component deterioration as well as reduced cooling system efficiency.

Likewise, operational downtime due to flooding events may have financial implications for assets that are paid on an availability basis across sectors such as roads and rail track infrastructure.

Positively, Equitix has seen intelligent climate risk management providing a practical mitigant to such hazards materialising.

As part of investing in a renewable energy hybridisation platform located in Spain, Equitix worked directly with the developer to embed climate risk considerations into site monitoring, management and reporting. Building on an assessment of seven climate hazards, the project has since developed a comprehensive framework for integrating climate risk considerations into site selection, development plans and ongoing asset management, with clear communication on progress provided to a sub-committee of the board.

Similarly, a number of assets in the Equitix portfolio, including an energy from waste portfolio, a major road project and a high-speed rail line have each embedded climate risk into ongoing maintenance plans and capital expenditure decisions. This supports an active approach to resilience and adaptation that ensures continued stability against an evolving climate backdrop. From more resilient road surfacing, increased drainage and equipment capable of operating in higher temperatures, the mitigations in place demonstrate the practical solutions to move climate risk considerations from concept to reality.

Equitix has focused on arriving at a more precise understanding of climate risk by analysing the impacts and mitigants arising from climate change in the context of an asset’s location, sector, revenue profile and inherent resilience. As a result, measures to mitigate become clearer too.

This may include contractual protections that limit downside risk, the integration of climate risk into maintenance and lifecycle decision making, and behavioural changes which adapt ongoing asset management to the climate context, for example, offshore wind maintenance schedules avoiding periods most likely to experience storm surges which prevent safe passage from harbours out to turbine sites.

Some assets may need additional support and guidance on how to approach climate risk integration, however. Equitix’s experience shows an engaged and collaborative approach which is tailored to the individual circumstances of an investee asset and uses relevant analysis, clear actions and responsibilities. These points, as well as appropriate external support or monitoring systems can help drive impactful improvements.

Fundamentally, infrastructure assets are attractive to investors because of their stable revenue profile. Therefore, adapting to a more volatile climate context is not just about protecting against risk, but is imperative to creating long-term competitive advantage and maintain the core characteristics that appealed to investors in the first place.

What are the challenges and how do we move forward?

The precise impact of climate hazards can be difficult to measure, particularly over a long-term time horizon.

By its nature, scenario-based assessments take a hypothetical view of how the world may look but always come with a degree of uncertainty as to how an individual asset will be affected at a particular point in time.

Emerging market countries are typically among the most vulnerable to the consequences of physical climate change. Yet, perceptions of country risk – including political stability, quality of governance, policy uncertainty and general investment conditions related to the contractual certainty and property rights¹⁵ can make it difficult to replicate project models such as DPC in those markets.

However, this should not stop progress on investment in climate resilience opportunities, nor the integration of resilience-building measures to sustain asset resilience throughout the investment lifecycle.

Once hazards are identified, the question to investors and management teams should simply be, how could this harm the business and what can be done to mitigate or avoid that harm entirely?

And, for the most vulnerable parts of the world, the development of attractive structures for private investment will be vital to increasing climate-resilient finance, not least given the potential for every $1 of adaptation investment to deliver over $10 of benefits over a 10-year period¹⁶.

As the world veers further away from a 1.5°C Paris-aligned emissions reduction trajectory, it must be accepted that climate extremes will only become an ever more present consideration for investors and management teams alike.

For LGPS and infrastructure investors alike, the adaptation imperative is not a distant, fuzzy sustainability theme. It is a question of protecting long-term value, supporting the delivery of essential services and maintaining stable performance. Intelligent, actively managed infrastructure capital has a central role to play in answering this question.

1. 160 million hectares burned and sea temperatures at record highs: 2026 is shaping up to be a year of extreme warming | Climate | EL PAIS English
2. Rhine falls to record low levels as drought strains Europe’s rivers – BBC News
3. France temporarily shuts down three nuclear reactors over heatwave – France 24
4. Rail resilience concerns as Met Office issues red weather warning | New Civil Engineer
5. Estimating the economic costs of physical damage – Office for Budget Responsibility
6. Global Assessment Report (GAR) 2025 | UNDRR
7. Economic losses from weather – and climate-related extremes in Europe I Indicators I European Environment Agency (EEA)
8. Estimating the economic costs of physical damage – Office for Budget Responsibility
9. TAR-06
10. World Energy Investment 2026
11. Net Zero Emissions by 2050 – World Energy Outlook 2025 – Analysis – IEA
12. The-macroeconomic-case-for-investing-in-climate-adaptation.pdf
13. A-Major-Projects-Guide-for-Investors-June-2025.pdf
14. Major Water Infrastructure Programme – Ofwat
15. Unlocking Adaptation Finance in Emerging Market and Developing Economies; Staff Climate Notes; November 2024
16. RELEASE: WRI Study Finds Climate Adaptation Investments Yield Massive Returns – Over $10 for Every $1 Spent | World Resources Institute