The $365bn climate adaptation gap: a material risk and opportunity for the finance industry

Insured losses from natural disasters exceeded $100 bn in 2025¹, a stark reminder of how climate‑fueled extremes are hitting balance sheets worldwide. From typhoons and floods across Asia to droughts in Africa, heatwaves in Europe and storms and wildfires across the Americas, the financial fallout dominated global headlines, underscoring the rising cost of inaction and the urgency of building resilience.

These trends are translating into declining asset values as supply chains are disrupted, infrastructure is damaged and an increasing share of damages are left uninsured, posing greater credit risks for financial institutions, as well as increasing pressure on insurance and reinsurance markets.

At the same time, investment in climate adaptation — measures that help economies and communities withstand these impacts — is far below what is needed. UNEP’s 2025 Adaptation Gap Report estimates that developing countries alone could require $365bn annually by 2035, yet international public adaptation finance flows to developing countries remain far below that, at only $26bn in 2023.

The result is a widening adaptation finance gap that is quickly becoming both a systemic risk and a missed economic opportunity. Recent analysis suggests that the required adaptation to a changing climate by economies and business could represent $9 trillion in investment opportunities by 2050². Investment is needed to fund climate-resilient infrastructure and water systems as well as for climate-smart agriculture and urban resilience.

Why investment in climate adaptation is lacking

Given the requirements for adaptation and the potential opportunities for investment, why is there still a gap? It's complicated.

Unlike climate mitigation, where emissions reductions provide a common metric, climate adaptation is inherently context specific. What constitutes a climate-resilient investment in one region or sector may look entirely different in another. This makes it harder for banks, insurers and investors to identify, classify and track adaptation activities within their portfolios. In short, investors still struggle to identify opportunities associated with climate adaptation.

A further barrier lies in how the performance of adaptation interventions are measured. Unlike traditional investments, adaptation often generates value by avoiding losses rather than creating direct revenues. Flood defences, for example, protect assets and reduce future damages, but their financial benefits are rarely captured in conventional metrics. This creates a blind spot.

Moreover, many companies and infrastructure operators are already investing in resilience as part of normal business operations, yet these efforts are seldom measured or disclosed in a way that financial institutions can evaluate. As a result, the value represented by adaptation measures remains systematically undervalued in risk models, credit assessments and investment decisions.

Even where opportunities to invest in adaptation are identified, for example by building flood defences or installing air conditioning to better manage extreme weather, many projects fail to attract funding. Upfront costs can be high, projects may require long time horizons before benefits are seen, and the benefits may be shared, which can make it harder to capture returns through traditional private finance structures. For example, the upfront costs to a company of building flood defences around their offices are high, there’s no guarantee of when the benefits of these defences will be realized i.e. when a flood will occur, and neighbouring businesses or residences may also benefit from the defences, making it difficult to identify who should pay for the infrastructure.

What’s needed to address the adaptation finance gap?

First of all, investors need a common language for adaptation. This is why UNEP FI and partners published an adaptation finance playbook that provides investors with improved comparability across markets. It helps investors to distinguish resilience-building activities and improve access to concessional finance for countries, organizations or projects looking to fund adaptation solutions.

Secondly, investors need to be able to identify projects and measure impacts. To this end, UNEP FI launched the 'Investors Resilience Challenge' at COP30 last year alongside fifteen development finance institutions and finance industry groups with the aim of scaling finance for adaptation from both public and private sources. Currently, development finance institutions employ a wide range of frameworks and approaches for adaptation finance. The co-initiative aims to simplify adaptation financing by helping financial institutions, such as banks and investors, to identify eligible projects and measure the real-world impact of these investments. Standardised ways to measure the real-world impact of financed activities are being developed, such as a new toolkit from UNEP FI, which provides a framework for assessing, tracking and reporting resilience-related outcomes.

From niche to necessity

With the World Meteorological Organization warning that global temperatures are likely to remain at or near record levels in the coming years, and a strengthening El Niño threatening further extreme weather, the time for climate adaptation measures is now. It is no surprise that at COP31 in Antalya, co-hosted by Türkiye and Australia in just a few weeks, the focus is shifting from ambition to implementation, with adaptation emerging as a central priority.

Against a backdrop of unfulfilled public finance commitments, closing the adaptation finance gap requires more than a single solution. Better identification of activities that genuinely strengthen resilience, improved methods to measure and demonstrate their impact, and stronger collaboration between public and private actors to de-risk investments and bring projects to scale are critical. Financial institutions that rise to these challenges will be better positioned to manage the inevitable risks associated with climate change and primed to tap into a rapidly growing market.

¹Munich Re, Climate change presses on: Devastating wildfires and intense thunderstorms exacerbate losses for insurers, 13 January 2026

²World Economic Forum, Sizing the $9 trillion climate adaptation investment opportunity, 7 August 2025