Investing in climate adaptation opportunities

Looking across the field of climate adaptation investments, I see climate adaptation bonds that raise money from investors to fund climate adaptation projects and some catastrophe bonds which insure real estate from catastrophic weather events. But there are really very few investments that might consider the opportunities from climate adaptation.

I have thinking about an investing framework to consider how funding climate adaptation might lead to investment out performance. My current thinking is climate adaptation in areas of high agglomeration.

Agglomeration is an emerging area of economic research but the basic premise is that certain cities and regions benefit from agglomeration where the existing businesses and research institutions ‘pull’ smart people into them who then create an ever greater pull for smarter people. It is becoming clearer that the value of cities is highly related to the rate of agglomeration. Research has focused on productivity benefits, living cost factors, and labor supply/migration decisions as a measure of agglomeration but there is growing evidence that in areas of high agglomeration, there are even more benefits.

Kerr and Duranton suggest these benefits might include the ability for ideas to be tested faster with the better teams available in the city of high agglomeration (rate of innovation). People split from companies and start new companies (rate of new, high-value company formation). Companies that beat their competitors can turn around and hire people from those losing companies (company scaling ability). Overall, the rate of economic growth in high agglomeration is not linear, it is exponential.

What does this mean to climate adaptation investing?

What makes an piece of climate adaption infrastructure increase in value and therefore generate investment returns? It would not be that the infrastructure protects existing value (i.e. property markets) as this piece of infrastructure would only be valued as an additional cost. It would be that the piece of infrastructure enables a higher rate of economic growth which I would consider to be a higher rate of agglomeration. Probably similar to the impact of air conditioning in Singapore. But more holistic about infrastructure given that it won’t just be rising temperatures but high intensity rainfall, fires, dust storms, storm surges and water shortages.

So the framework is to pick areas where climate adaptation infrastructure will materially improve the agglomeration rate.

Now how would I map that?