A changing climate, El Niño and the adaptation economy

In Europe’s heatwave, water levels on the Rhine, the continent’s second-longest river, have fallen. Barges moving raw materials, fuel and goods have reduced capacity by as much as half. France’s nuclear power output was cut back as rivers were too warm to cool reactors, and German train operators limited services as rails warped. These may look like local disruptions, but they show that climate change has become an economic risk, forcing firms to adapt and investors to ask new questions.

Beyond Europe, the World Meteorological Organization (WMO) forecasts an intensifying El Niño event over the months ahead. The Pacific Ocean’s meteorological phenomenon increases the probability of heatwaves, drought or rainfall across sub-Saharan Africa, Asia, Oceania, and Latin America. While it did not directly cause Europe’s recent heatwaves, it amplifies background global warming and raises the likelihood of weather extremes. It should therefore not be seen as an isolated meteorological event but as a preview of how a warmer and more unstable world increasingly affects economies, companies and their investors.

The macroeconomic impacts of El Niño are hard to both quantify and predict but affect everything from crop production and food prices to hydroelectric power generation and demand. We assume the major impact could be to crop production, notably wheat, corn, rice and soybeans, with the risk of farming and power interruptions in many key emerging markets. As these weather events follow the significant supply-side shock to nitrogen fertilisers from the Middle East, the economics of grain production will be unusually fragile through the rest of this year. Agricultural output, food price inflation, and monetary policy will be particularly vulnerable in India and Southeast Asia.

A warming world is thus raising long-term physical climate risks, with implications for infrastructure and security in sectors from power and mobility to natural resources and food production. Climate disruptions are exposing deficiencies in economic systems that are no longer optimised for a changing environment. Climate risk is therefore more than an issue for sustainability experts; it should become a core question for firms’ capital spending, impacting everything from corporate procurement decisions to strategic planning.

…investors have tended to ask only which firms were exposed… the more relevant question will be which companies are prepared

Until recently, markets were quicker to price transition narratives – companies with affordable and scalable solutions to sustainability issues – than to assess individual businesses’ underlying resilience to physical shocks. This is because investors have tended to ask only which firms were exposed to climate change. Increasingly, the more relevant question will be which companies are prepared, as such extreme events more frequently impact earnings, margins and valuations worldwide.

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Firms are increasingly moving from passive disclosures towards actively managing risk. Disclosure remains an important lever to accelerate climate risk mitigation in some geographies, steering capital from investors with sustainable interests and/or commitments, but environmental stresses demand adaptation measures to ensure resilience.

To be clear, ‘mitigation’ attempts to address the causes of climate change, while ‘adaptation’ addresses the consequences we are already living with. Investors need to think about both.

Some companies are already assessing sites, suppliers and key inputs, and using the findings to reshape operations and investment decisions. Firms that identify vulnerabilities early, and adapt supply chains before disruptions become acute, will be better placed to meet the challenges than those where any sustainability commitments start and finish with reporting risks after the fact.

From exposure to preparedness

The second visible shift is that corporations are moving from mitigating climate risks alone to adapting to them. As mitigation has been slow, physical risk is likely to dominate, and adaptation will become key. Companies will choose between the cost of action and the cost of inaction by estimating whether measures will prove profitable or not.

Exposure tells us where the pressures are, preparedness tells us who is best positioned to successfully navigate the challenges

According to re-insurer Munich Re, global natural disaster-related losses reached USD 232 billion in 2025, and USD 384 billion in 2024 (see chart 2). Average losses over the past ten years have risen more than 60% compared with the previous decade. A rise in insurance costs seems likely for many.

The third shift is about how investors assess companies, by combining a focus on climate exposure with their level of preparedness. Exposure tells us where the pressures are, preparedness tells us who is best positioned to successfully navigate the challenges. Companies with diversified operations, flexible sourcing, robust water management, and the ability to pass on higher costs without weakening demand, will prove better able to protect profitability.

Traditional financial analysis and sustainability research can combine to generate useful insights. Where two businesses face similar theoretical physical climate risks, they may deliver different outcomes because one has the planning, supplier relationships, and infrastructure in place to make preparedness a source of competitive advantage. Just as investors have historically rewarded companies with stronger balance sheets or superior pricing power, climate preparedness may increasingly become a source of valuation differentiation in the form of a climate ‘preparedness premium’. Our sustainability assessment of companies tries to take this holistic view, not just by assessing where a company derives its profits, but how it is positioned, and whether it contributes more broadly to sustainable outcomes. 

Adaptation as an investment theme

Adaptation is therefore the next stage in sustainable investing. Adaptations to improve the resilience of our economies’ infrastructure can enhance productivity, boost resource efficiency and create value, with opportunities in public and private markets.

Water is at the heart of these concerns. It is one of the most strategic and underappreciated economic inputs with implications for farming, industry, mining, energy generation and logistics. As shown by falling river levels, hotter conditions and more irregular rainfall can pressure not just food production and transport, but also energy demand and generation from, for example, datacentres or nuclear reactors that rely on cooling water.

The market for water treatment, recycling, monitoring, leak detection, storage and distribution infrastructure will therefore expand as scarcity becomes more economically visible. In agriculture, practices such as agroforestry, cover crops and no-till farming improve soils by retaining moisture and supporting yields during dry periods.

The adaptation economy will be fundamental to the climate transition

Another opportunity is in climate intelligence. Companies that need more detailed physical risk assessments also need better data, modelling and planning tools. The same is true for scenario analysis that assesses how a changing climate affects business performance and investments. This will expand demand for engineering and environmental consultancies, climate analytics and resilience specialists.

Finally, climate resilience is not only about physical infrastructure but increasingly includes the resilience of health systems and human capital. Recent European heatwaves have led to excess mortality, increased emergency admissions and rising healthcare costs, while reducing productivity across outdoor sectors including construction, transport, and agriculture. Temperature changes and precipitation patterns can also alter the spread of vector-borne and water-borne diseases, increasing pressure on healthcare systems.

A warmer and more unstable world will make resilience more valuable, and a differentiating factor. Investors will have to assess which companies, assets and business models are genuinely prepared for climate challenges. That demands more sophisticated analysis adapted to the long term. In our view, the adaptation economy will be fundamental to the climate transition as it shapes capital allocation and investment opportunities. In many cases, the question is no longer whether adaptation has a cost, but whether the cost of inaction is greater.