The Case for Investing in Climate Adaptation

You’re about to hear a lot more about climate adaptation. The warming globe is raising the risks of climate-related disasters, as the deadly Palisades and Eaton fires in greater Los Angeles show.

Wildfire risk has risen as climate change makes rainfall more unpredictable. And for all of society’s efforts to curb global warming, 2024 was the hottest year on record. Temperatures will continue to rise for at least another century. Global temperature is on track to rise by 2.5 degrees Celsius to 4.5 degrees Celsius (4.5 degrees Fahrenheit to 8.0 degrees Fahrenheit) by 2100.

AccuWeather estimates damage and economic losses from the Los Angeles fires between $135 billion and $150 billion. [By comparison, AccuWeather’s estimate of the losses caused by Hurricane Helene is at $225 billion to $250 billion.]

What Is Climate Adaptation?

Climate adaptation is the industry built around creating resilience in our infrastructure as the planet gets hotter. Of course, exceeding the targets set by global leaders to curb global warming doesn’t mean we stop trying to cut emissions. But it does mean we need to reshape our lives to the warming climate—which creates opportunities for investors.

“How do you adapt and think about a world where you’re looking at 2.5 Celsius [target]? I would guess every investor would be thinking along these lines,” says Tony Tursich, a portfolio manager at Calamos Investments, who specializes in sustainable equity portfolios, including Calamos Antetokounmpo Global Sustainable Equities ETF.

In a recent report, Sara Mahaffy, global sustainability strategist at RBC, said she “expects to see increased opportunities in climate adaptation themes, in light of the growing number of extreme weather events and rising discussions of physical climate risks during earnings calls.”

3 Key Climate Adaptation Themes for Investors to Consider

Sure, Home Depot HD and Lowe’s LOW are oft-cited beneficiaries of climate adaptation, on the thesis that people rebuilding their homes after an event such as a hurricane or a wildfire pay multiple visits to home improvement centers.

Here are other examples and themes.

• Heating, ventilation, and air conditioning, or HVAC. More air-conditioning systems will be needed to keep buildings comfortable in areas that didn’t previously need them, and longer summers will mean that replacement rates for existing AC units will rise. Those needs will only increase as cloud computing and artificial intelligence require large server farms with intense cooling needs.
• Water. Droughts and water scarcity incidents are likely to rise. In 2023, New Orleans declared a state of emergency amid potential threats to the city’s drinking water, after saltwater flowed into the drought-stricken Mississippi River. More capital will be spent on water treatment, filtration, pumps, meters, and pipes.
• Engineering. Cities, towns, governments, and industries need to make infrastructure more resilient as the globe warms. As every port in the world faces rising seas, governments will need to step up their disaster warning and flood defenses. “Pretty much anything in infrastructure is an opportunity to build in climate adaptation and resilience,” says Julie Gorte, senior vice president for sustainable investing at Impax Asset Management.

How Big Is the Climate Adaptation Market?

It’s hard to know. The World Economic Forum sizes up the market at $2 trillion by 2026. To be sure, rising temperatures could cut into economic growth, but spending on climate adaptation measures can offset that.

Says Chris Goolgasian, director of climate research at Wellington Management: “It will be in [multiples of] 10, 20, 30 trillions of dollars.” Goolgasian expects to see new legislative initiatives from many different jurisdictions for such things as protecting food infrastructure, coastal dredging, and building and infrastructure hardening. In 2022, for example, Florida passed the Home Hardening Sales Tax Exemption to help Floridians reinforce their homes, with such things as hurricane-resistant glass. The city of Toronto is offering subsidies to homeowners to protect their homes against basement flooding by doing such things as installing backwater valves and sump pumps.

Climate adaptation investing encompasses a broad range of sectors, including more defensive stocks like materials and healthcare, as well as growth companies producing climate tech.

“You do not need to be a climate change warrior or even care about the climate to recognize the fundamental demand for solutions to the real world, economy-impacting weather events,” says Stephanie Kelly of UK investment firm Redwheel. “Adaptation is increasingly coming into focus as an area where action has really been lacking.”

What Companies Benefit From Climate Adaptation?

Here, we highlight several companies in industries like HVAC, water, and engineering that stand to benefit from this transition. This list is by no means exhaustive. And we’re not recommending them necessarily. You’ll have to do more research, checking the investment theses and financial metrics, including Morningstar Ratings and fair value estimates. But they’re a starting point to illustrate companies and trends that will benefit.

Benefiting From Global Warming

Source: Morningstar Direct. As of January 10, 2025.

One company on this list is Trane Technologies TT, the HVAC and refrigeration company spun out by Ingersoll Rand in 2020. Today, it’s a global leader in efficient heating, ventilation, and cooling, helping make smart buildings more efficient. A climate-investment darling, Trane has returned 26.6% a year over the past three years to Jan. 10, 2025, compared with 14.3% for the building products sector and 8.6% for the Morningstar US Market Index.

Like Trane TT, many companies once resided in other companies that spun them out, and we expect this trend to continue as investors seek adaptation pure plays. For example, HVAC and refrigeration specialist Carrier Global CARR was spun off by the former United Technologies (now RTX RTX) in 2020. In 2021, water company Zurn Elkay Water Solutions ZWS was spun out by Regal Rexnord RRX. In 2023, Danaher DHR spun off Veralto VLTO, its water-quality business.

Other Climate Adaptation Themes

What are some other beneficiaries? We checked in with investors.

• Building materials. Tursich is a fan of Ferguson Enterprises FERG, which distributes a wide range of building products, including lighting, building materials, wastewater solutions, and pipes. A big chunk of revenue comes from water infrastructure. “As we’ve seen, infrastructure isn’t adequate to deal with putting out these fires in cities, because they were designed to deal with single-structure fire,” says Tursich. The portfolio manager also likes St. Gobain CODYY, which makes fire- and impact-resistant glass for commercial buildings as well as recycled insulation. The glass panels control interior climate, allowing more or less heat and light and programming buildings to comfortable temperatures.
• Climate-aware REITs. Sam Adams, CEO of Vert Asset Management, invests in real estate companies that are committed to sustainability. Among other things, Adams ranks companies on their resiliency, which includes their climate adaptation plans. Adams notes that Prologis PLD has invested in grid resiliency for its warehouses, to improve efficiency. Boston Properties BXP has flood protection measures for its waterfront property in Boston. Hannon Armstrong Sustainable Infrastructure HASI invests in solar and other renewables, as well as resiliency projects, and finances building upgrades that improve energy efficiency. “Hannon Armstrong is helping normal companies deploy solutions,” says Adams.
• Early warning systems companies could also be beneficiaries, says RBC’s Sara Mahaffy.
• Green bonds, or bonds that raise money for climate-related projects. “Climate adaptation is becoming an integral part of mitigation,” says David Zahn, head of sustainable fixed income at Franklin Templeton. Indeed, many countries that border the Indian Ocean or the Pacific Ocean are “past mitigation,” Zahn says. According to the United Nations, adaptation costs in developing countries could reach $300 billion every year by 2030. Right now, only 21% of climate finance provided by wealthier countries to assist developing nations goes toward adaptation and resilience.

One US example owned in Franklin Municipal Green Bond ETF FLMB is a 5% Alameda, California, bond maturing in 2048 that raised $17.5 million for embankments, a seawall, and other improvements to protect the district against a sea level rise of 7 feet. Another is a 4% bond issued by the Metro Flood Diversion Authority of North Dakota, maturing in 2051 and 2056, which is being used to fund the design, construction, and maintenance of the Fargo-Moorhead Metropolitan Area Flood Risk Management Project, including a 30-mile stormwater diversion channel.

“Global warming is going to happen,” says Zahn. “You can argue what the cause is. Ocean levels will rise, and we need to adjust.”

This story was originally published on Dec. 14, 2023, and has been updated.