Written by LGT Crestone Head of Sustainable Investment Amanda MacDonald and LGT Crestone Chief Investment Officer Scott Haslem
There is little doubt that Australia has already begun to feel the impacts of a changing climate. In August alone, Sydney recorded its highest amount of rainfall since record keeping began in 1858. Earlier in the year, the Gold Coast endured an unprecedented cyclone, and Northern Queensland was devastated by floods. What were considered ‘once-in-a-century’ storms now seem to occur almost annually – a stark and undeniable reminder of the accelerating climate challenges we now face.
It also reflects the grim reality that the world is unlikely to limit global warming to the 1.5 degree Celsius (C) target set by the 2015 Paris Agreement. Current trajectories suggest a warming of at least 2.7C or higher being more realistic. Rising temperatures mean climate adaption is no longer optional, it’s essential. While countries like China are investing heavily in renewables to secure both energy security and resilience, Australia must also recognise that future proofing against climate risk is as critical as emissions reduction.
These changes are already reshaping our environment, economy and investment landscape, and on our current path, these impacts will only intensify in the decades ahead. For investors, this means adaption is not simply a moral or environmental imperative, but a financial one – safeguarding your portfolio against systemic risks while unlocking opportunities in resilience focused sectors.
“What we’ve experienced by breaching the 1.5C trajectory, we’ve seen floods, bushfires, and heatwaves all over the world”.
Climate adaption refers to the process of adjusting to actual or expected changes in climate, with the objective of reducing vulnerability, mitigating risk and strengthening resilience. Unlike climate mitigation, which focuses on reducing greenhouse gas emissions (GHGs), adaption acknowledges that some level of climate change is already unavoidable. As global temperatures continue to rise, extreme weather events such as floods, heatwaves, and bushfires are increasing in both frequency and intensity. Climate adaption strategies therefore aim to safeguard infrastructure assets, communities, ecosystems and economies against these extreme weather events.
Adaption can be anticipatory or reactive. Anticipatory adaption involves planning and investment to prepare for potential climate scenarios before they occur. Examples include upgrading flood walls in vulnerable cities or coastal areas, retrofitting buildings to withstand heat stress, developing drought resistant crop varieties, or redesigning suburban drainage systems to handle more rainfall. Reactive adaption, on the other hand, refers to measures enacted after climate impacts have been felt, such as government relief spending, emergency relief operations, rebuilding infrastructure and assets after disasters, or restoring damaged ecosystems.
For Australia, climate adaption is particularly urgent. We face some of the highest per capita exposure to extreme weather globally, with droughts, heatwaves, rainfall, cyclones and bushfires all threatening critical infrastructure, industries and communities. Adaption is no longer an ethical consideration; it’s a financial imperative.
Failing to invest in climate adaption has the potential to cost Australia billions of dollars in lost productivity, property damage, infrastructure damage and increased government spending.
“Adaption cannot be the neglected half of the climate equation, indeed 50% of climate finance should be allocated to adaption and resilience in most countries”.
“Billions of dollars could be saved by the Australian Government today if national leaders got serious about investing in extreme weather adaption”.
The interim 2024 State of the Climate Report released jointly from the CSIRO (Commonwealth Scientific and Industrial Research Organisation) and the Bureau of Meteorology confirms what most Australians already feel; more frequent heatwaves, longer bushfire seasons and more intense and prolonged rainfall events. Climate modelling continues to provide a consistent picture of ongoing, long-term change to our climate, interacting with underlying natural vulnerability.
The report finds that associated changes in weather and climate extremes, such as extreme heat, heavy rainfall, coastal inundation, fire and drought, exacerbate existing pressures on health and wellbeing of our communities and ecosystems. What is clear from the interim report is that Australians (communities and governments) need to plan for, and adapt to, the changing nature of climate risk now and in the decades ahead.
“The final report on economic and environmental risks posed by the climate crisis is ‘intense, scary and confronting’, even for those who work in the area, according to people familiar with the final assessment. They said it includes scenarios that showed that the climate crisis would affect all Australians”.
But the Australian Government is yet to release the final findings of its State of Climate Report. The ruling Labor Party has continuously delayed the release of the report which is widely believed to be because of the severe budget implications of the forecasted costs. The impacts to the Australian Government budget are expected to be significant, particularly to specific sectors and industries. The report conducted analysis on eight systems; defence and national security, the economy, trade and finance; First Nations; health and social support, infrastructure and built environments, the national environment, primary industries and food and regional and remove communities. The results suggest that under a number of scenarios major systems, including electricity networks, transport routes, food production and supply, and the financial sector, could struggle to cope with rising temperatures and escalating extreme weather events.
“If you get rid of net zero, you are saying climate change is not real and you do not need to do anything about it”.
A raft of agriculture groups, farmers and other state bodies have been pressuring the release of the detailed government report as soon as possible. It is anticipated that the modelling outlines potentially catastrophic effects of climate change on Australian farming and agricultural industries. Climate Change and Energy Minister, Chris Bowen has indicated that “The Australian Government was close to, but not yet finished, finalising its first ever comprehensive assessment of Australia’s climate change risks”.
“National disasters cost Australia’s economy AUD 2.2bn in the first half of 2025. Wild weather, including Cyclone Alfred and floods in NSW and Queensland, significantly slowed retail trade and household spending."
One of the clearest cases of climate adaption investment lies in the economics. It’s the cost of ‘inaction’ that is far greater than ‘adaption’. We are already seeing that play out today, rising government spending in disaster recovery, soaring insurance premiums, and mounting infrastructure losses impact not only public balance sheets, but private ones as well. The Australian Productivity Commission, in its inquiry into natural disaster funding, highlighted that Australia already spends far more on post-disaster recovery, than on being more prepared. A staggering 97% of disaster funding is devoted to response and recovery, whilst a mere 3% is allocated to mitigation and adaption.
Globally, The World Bank estimates that active climate adaption could generate net benefits of up to USD 7.1 trillion by 2030. This makes it a clear case to investors, that funding adaption is not only about downside risk management but also capturing efficiency gains and reducing asset volatility. According to the latest World Economic Forum Global Risk report, extreme weather events ranked second in the current global risk perception, coming only behind to geopolitics and state-based conflicts. Investors are becoming increasingly aware of the rising risks and must consider how to prepare their portfolios for unsystematic and idiosyncratic shocks.
Australia can limit the risks of a changing climate by prioritising and investing in adaption, in turn reducing the costs of response and recovery. The Australian Government is well placed to lead the adaption effort through a coordinated, comprehensive and adequately resourced national strategy known as the National Adaption Plan.
Certain industries and areas in Australia stand at the front line of climate risks. Agriculture is heavily exposed to drought but also to extreme rainfall, which impacts crop yields, livestock productivity and water security. Real estate and infrastructure face escalating costs such as building codes, materials and urban planning which need to adjust to more frequent flooding, heatwaves and bushfires. Tourism too is under pressure from ecosystem loss, particularly in the Great Barrier Reef, and the shrinking of Australia’s Ski Season. Meanwhile, insurance and financial services firms are grappling with recalibrating their models to price escalating physical climate risks. In Northern Australia, household insurance premiums are now multiples of the national average, leaving many individuals unable to secure coverage at all. This widening ’insurance gap’ not only exposes households, but also banks, investors, and governments to ever growing risk. Traditional insurance models are struggling to price in the scale and frequency of losses. And so, we are seeing the emergence of things such as parametric insurance (also known as index-based insurance), which pays out based on pre-agreed triggers like wind speed or rainfall levels. And globally, an increase in catastrophe bonds (cat bonds), that transfer specific climate risks, such as bushfires, cyclones or floods, from insurers back to investors, in return for yield that is historically uncorrelated to traditional asset classes; a flood in QLD is unlikely to move in tandem with Australia’s ASX200 equity index. They also offer a higher yield compensating investors for the risk of loss.
Ten years after the Paris Agreement, 2025 marks a pivotal moment for adaption finance. According to the World Economic Forum, the global cost of climate-related loss and damage for FY25 is expected to reach USD 145bn, rising to as much as USD 3.1tr by 2050. The scale of this challenge now means that there is a myriad of companies, both listed and unlisted – and at various stages of their development and technology journey – that are directing their efforts toward climate adaption to mitigate some of the potential economic, social and environmental losses.
Technology is emerging as one of the most powerful levers for climate adaption, offering investors access to scalable solutions that cut across industries and regions. Artificial intelligence (AI) and data modelling are being used to improve climate risk forecasting, from AI-driven flood and fire models that guide urban and cities planning, to satellite monitoring systems that help track drought conditions in real time. Companies such as AvalonBay Communities (US) are already using these tools in their real estate development by using third party resilience assessments to screen for climate risk before acquisition.
State governments are increasingly linking bond proceeds to adaption projects such as stormwater management, transport resilience and coastal defence systems.
Private market investment is one of the most powerful levers for climate adaption, especially in Australia where public funding has historically skewed to post disaster recovery. Private capital can help to scale adaption technologies and providing critical funding to accelerate innovation.
Private market investment is one of the most powerful levers for climate adaption, especially in Australia where public funding has historically skewed to post disaster recovery. Private capital can help to scale adaption technologies and providing critical funding to accelerate innovation.
Looking ahead, there is strong potential for breakthroughs in fire-resistant materials, climate smart agriculture technologies and advanced water management systems, all of which are going to be critical for Australia to adapt to our changing climate. For investors, this intersection of technology and adaption represents a dual opportunity, to hedge against the downside risk associated with increased climate risk, while backing innovative companies and sectors, positioned to benefit from increasing climate change.
Even with strong global action to reduce emissions, the impacts of climate change will continue to increase over the coming decades due to past emissions of greenhouse gasses. Practical action to adapt to climate change will protect individuals, communities, organisations and investment portfolios. This means Australians must anticipate, manage and adapt to its changing climate.
Global equity markets have continued to rally, buoyed by another strong US earnings season, moderating geo-political tensions, and a dovish pivot by the US Federal Reserve in late August. We maintain our cautiously optimistic positioning, though we acknowledge that near-term market dynamics appear to be showing signs of over-exuberance. This warrants monitoring.
Beyond this we continue to believe that US trade and global geo-political uncertainty have peaked, reducing negative tail risks to global markets and the global economy. In addition, we continue to believe that tariffs are ultimately disinflationary, particularly outside the US, and that ongoing progress on bringing inflation back to target will allow global central banks to continue modestly cutting rates into the back end of 2025.
We also maintain our out-of-consensus view that the recently passed ‘One Big Beautiful Bill’ in the US is more fiscally disciplined than first feared, and incorporating the latest estimates of tariff revenues, is contractionary over the next 10 years. This should support global fixed income markets, which are offering attractive all-in yields to investors. Resilient corporate earnings and the promising potential upside from the artificial intelligence (AI) roll-out could add another feather to the admittedly extended equity rally.
Downside risks remain, with still-high levels of overall policy and geo-political volatility, and growing signs of underlying frailty in the US economy. We continue to monitor macro and market conditions, keeping a watchful eye on our most likely downside scenario—a disinflationary negative growth shock. If such a scenario occurs, fixed income should reclaim its role as a portfolio diversifier.
Reflecting our view that negative tail risks have moderated and our conviction in fixed income, we maintain our overweight to investment grade credit. We also retain our modest overweight to global equities, with a preference for Japan and Europe.
Has policy uncertainty peaked? Our frameworks tell us that trade and geo-political uncertainty have peaked, pointing to moderating (though still-present) tail risks to the global economy.
Tariffs are disinflationary: While we expect to see a mechanical lift in US goods inflation over coming months as tariffs work through the system, we continue to believe that as a tax that weighs on consumer and business demand, tariffs are ultimately disinflationary.
Can central banks keep cutting? Progress on inflation and the ultimately disinflationary impact of tariffs should allow central banks to continue the global rate cutting cycle they started in 2024. US policy uncertainty presents a key challenge in balancing downside risks to growth with perceived inflation fears.
Opportunities are ripe for ‘active’ hunters vs ‘passive’ gatherers: The best opportunities will likely lie beneath the broad index level, rewarding more active ‘hunter’ versus passive ‘gatherer’ investors. This has proven particularly true so far this year.
Fortune favours the bold: 2025 is likely to continue to favour investors who can digest and exploit the opportunities that come with market volatility. Prudent portfolio diversification and active management will be important tools in the astute investor’s arsenal.
Welcome to a multi-polar world: The global community is increasingly realising that we have entered a multi-polar world, an environment that will likely create more volatility and uncertainty, but also present more growth and opportunities for investors.
The energy transition is growing more challenging: Policy uncertainty, cost, energy security, and more extreme physical impacts are likely to complicate an already-challenging energy transition.
The rise of artificial intelligence: AI presents significant challenges and opportunities for the global economy and human society.
Higher base rates increase investor options: We expect interest rates to remain higher-for-longer, particularly relative to the post-GFC zero interest rate policy environment. Higher base rates increase forward-looking returns across all asset classes, giving investors more options to build robust, multi-asset portfolios.
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