Global warming is causing sea levels to rise, heatwaves to increase in severity, and floods and storms to be more common. Rural areas are often perceived to bear the brunt of these physical impacts, but urban areas are not immune. Cities are likely to face major climate-related physical disruption in the near future. Impacts such as heatwaves and heavy rainfall may cost the UK, for example, as much as 1.5 per cent of GDP by 2045, according to estimates.

Planning and investment in adaptation is key in preparing for and mitigating this toll, including flood protection, nature restoration and green infrastructure. However, research shows that businesses could be underestimating investor losses from physical climate risks by as much as 70 per cent, rising to 82 per cent when extreme risks such as cyclones and floods are also taken into account.

Financing change

To address this issue, businesses need to be able to attract the requisite investment to fund climate adaptation projects. Blended finance mechanisms can help with this, combining public and private resources to reduce investor risk. Specific market instruments such as catastrophe bonds, environmental impact bonds and insurance premium incentives can also mitigate risk.

Similarly, grant funding can help to cover project development costs and protect against initial losses, while government guarantees can help to reduce perceived risks for investors. More radically, a switch to results-based financing may help to shift industry focus away from tokenistic actions and towards achieving specific adaptation outcomes.

Recent research from Imperial’s Centre for Climate Finance and Investment explores some of these approaches in detail. The research focuses on how climate adaptation and resilience measures can be financed to protect London and the UK from physical climate threats, including lessons from Copenhagen and Singapore.

Firms should be looking to integrate physical climate adaptation into their net-zero strategies, making it a shared responsibility across the C-suite.

First steps in adaptation

Currently, firms frequently rely on commercial risk assessments using corporate-level scoring systems. These lack transparency and are difficult to reproduce, and they tend to miss the crucial location-specific vulnerabilities that climate change is rapidly exacerbating.

Compounding the issue, small and medium-sized enterprises (SMEs) often lack the tools and information to effectively carry out more accurate assessments, or lack the management will to address an issue that sits beyond the typical risk management horizon of 3-10 years. Climate adaptation projects are also tricky to fund, being highly site-specific and resource-intensive.

Culturally too, there is an issue with how firms view adaptation. World Economic Forum research found that while 60 per cent of businesses see climate mitigation as a very high priority, only 27 per cent felt the same about climate adaptation. This suggests many view climate risk as a general social responsibility or business opportunity, rather than an immediate threat necessitating practical action.

Taking steps

As an initial step, switching from corporate risk scoring to asset-level damage assessments would help provide businesses a more accurate picture in terms of climate risk pricing, particularly when it comes to highlighting vulnerabilities specific to a particular site or area. The findings can then inform continuity, crisis and recovery plans for climate-related physical events, from water supply stresses to natural disasters.

More broadly, firms should be looking to integrate physical climate adaptation into their net-zero strategies, making it a shared responsibility across the C-suite. Businesses can support this approach by conducting capability audits to measure how well climate resilience is embedded throughout different parts of the organisation.

Following this process, single points of failure can be addressed through such actions as diversifying supply chains and delivery routes. At the same time, businesses can create contingency plans to support the safety, health and productivity of their workforces in case of specific failures or risks occurring, and look to partner with stakeholders to develop system-wide responses.

Policy support

Realistically, these steps are unlikely to take place at the required pace and scale without adequate policy support. Governments need to build on existing reporting requirements from the Task Force on Climate-Related Financial Disclosures, mandating the type of comprehensive climate risk assessments and plans discussed above.

The International Sustainability Standards Board provides a framework for this, but policymakers still have a key role to play in terms of ensuring that businesses substantively engage with adaptation planning, rather than treating it as an inconvenient compliance exercise.

To help with this, governments can stipulate penalties for non-cooperation and provide financial incentives, including targeted financial support for climate adaptation project development at the same level that already exists for climate mitigation work.

Policymakers can also help to scale projects by coordinating stakeholders to encourage collaboration, and by streamlining regulatory processes to support investment. The establishment of dedicated offices, such as the UK’s Regulatory Innovation Office, can help to reduce regulatory barriers to climate adaptation technologies.

Future outlook

Looking long-term, adaptation policies can be explicitly linked to economic growth objectives, highlighting how climate resilience supports economic development. This includes incorporating adaptation into industrial strategies and innovation policies, ensuring that climate resilience becomes a cornerstone of economic competitiveness rather than an additional burden.

This is crucial, given the urgent need for businesses, investors and policymakers to start viewing physical climate adaptation not just as a social responsibility or an investment opportunity, but as an existential threat.

Edited 23 June 2025: This article’s strapline was changed for accuracy and to better reflect the findings of the research.