CLIMATEFIT Help Desk for Financial & Investment Entities

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Q 1.: Why should a financial institution finance climate adaptation projects while its focus is more related to profits and to customer satisfaction?

 

A 1. : Financing climate adaptation is an opportunity, but also a risk management strategy. Thus:

• Portfolio resilience: Adaptation investments reduce long-term credit and asset risk by strengthening the resilience of borrowers and underlying assets of the financial institution.
• Emerging market segment: Adaptation finance is a growing and underdeveloped market, offering finacial institution involved first-mover advantages and new client relationships.
• Regulatory alignment: EU frameworks increasingly emphasise climate risk management and resilience, making adaptation relevant for forward-looking financial institutions.
• Client demand: Corporates, local public administrations, infrastructure operators and others are increasingly seeking financing solutions for resilience.

In this context, financing adaptation is not in opposition to profitability, but contributes to long-term portfolio stability and strategic positioning, which in their turn contribute to profitability.

Q 2.:  How can a financial institution address lower returns from adaptation financing?

A 2.: While some adaptation investments may generate lower direct returns, financial institutions can address this through portfolio structuring and complementary instruments, rather than relying on standalone project profitability.
Approaches might include:
•    Blended finance structures: Combining public and private capital to improve risk-return profiles.
•    Portfolio approach: Integrating adaptation projects within broader portfolios, where returns are balanced across assets.
•    Risk-adjusted perspective: Lower nominal returns may correspond to lower long-term risk exposure, improving overall portfolio performance.
•    Cross-product integration: Embedding adaptation components within existing financing (e.g. infrastructure, real estate, corporate lending).
•    Access to EU instruments: Various EU-level tools are designed to support investments with strong public value but weaker standalone returns.
Overall, the objective is not to maximise returns on individual adaptation projects, but to optimise risk-return at portfolio level.

 

Q 3.: Why finance long-term adaptation projects instead of shorter-term, lower-risk ones?

A 3.: Long-term adaptation investments should be viewed as part of a balanced and forward-looking portfolio strategy, rather than as substitutes for shorter-term operations.

From a financial institution’s perspective, the following considerations should count:

• Risk mitigation over time: Adaptation projects reduce exposure to future losses and disruptions, which may not be captured in short-term lending decisions.
• Asset value protection: Many adaptation investments protect the long-term value of financed assets (e.g. infrastructure, real estate, utilities).
• Strategic positioning: Institutions that develop expertise in adaptation finance may gain competitive advantage as demand increases.
• Alignment with long-term liabilities: For certain institutions (e.g. insurers, pension-related investors), long-term investments can match long-term obligations.
• Regulatory and market evolution: Climate risk considerations are increasingly integrated into financial decision-making, making long-term resilience more relevant.

In other words, rather than replacing shorter-term, lower-risk activities, adaptation finance can complement them, contributing to a more resilient and future-proof portfolio.