What is climate adaptation and why do we need it?
Climate change is already causing more frequent and intense extreme weather events such as heatwaves, floods and wildfires. Temperatures will continue to rise even under the most ambitious emission reduction scenarios. We have to take action to make us less vulnerable to those harmful effects of climate change. This is known as climate adaptation.
Climate adaptation is linked to fighting climate change, or climate mitigation. When addressed jointly, their impact can be magnified. For example, urban green measures like green roofs help reduce GHG emissions from energy use. But it also increases water absorption capacity, thereby making urban areas more resilient to potential flooding events.
Prevent, respond, recover
Climate adaptation falls into the categories of preventing, responding, and recovering. In terms of prevention, nature-based methods show that a healthy ecosystem can provide natural buffers to climate disaster. For example, planting mangroves in a coastal wetland can help water storage, and thereby reduce flood risk in neighboring communities. For responding to climate disasters, technology and innovation, such as more accurate weather forecasts, is one area to focus on. And as for recovering, examples include insurance instruments or healthcare capacity to treat illness resulting from changing climate.
Adaptation requires investment by governments, companies and private individuals. However, the latest data from the non-profit research group Climate Policy Initiative shows that the majority of financial flows from both public and private sources in 2021 went to mitigation ($632 bln), while only $46 bln went to adaptation.
Banks’ role in climate adaptation
Climate adaptation is linked to physical climate risk. The more you adapt, the more prepared you are to withstand those risks. For banks, exposure to these risks are through our own operations and clients. So, to act on climate adaptation, banks should improve their understanding of the drivers of physical climate risk under different climate change scenarios, and the way they impact both their operations and their portfolios. This way, banks can identify business areas vulnerable to climate change and improve the effectiveness of their adaptation efforts by working with stakeholders and clients.
In other words, in addition to reducing the physical risk impact on their operations and portfolios, banks can support clients and communities to adapt and become more resilient to climate change by financing adaptation efforts.
To act on climate adaptation, ING aims to:
1. Continue adapting our own operations.
As a bank, we’re exposed to physical climate risks (in particular, adverse weather) through our operations. We must ensure that we can continue to deliver key services and products if such events occur. Our Business Continuity Framework identifies impacts of climate-related physical risks and our ability to recover from them. We revisit the assessment yearly, where we update and rehearse our recovery plans for disruptive events such as windstorms or flooding.
2. Support adaptations through our financing.
- Managing risk
When we finance clients who are exposed to physical risks from climate change, we’re exposed to those risks as well. Therefore, we aim to help clients adapt and become more resilient to climate change. The first step is to improve how we assess physical risk, using heatmaps and stress testing on our portfolio. These heatmaps can be applied both on a client basis and a transaction basis. We intend to use this insight to engage with our clients on their adaptation efforts and share best practices. Managing environmental risk, such as from biodiversity loss, can also contribute to adaptation, and we’re committed to working with our clients on this. For more information, read our position on Biodiversity.
- Risk to Opportunity: supporting clients.
Our biggest positive impact on fighting climate change is with our financing. We support clients in a variety of ways, from sharing best practices on the matter of climate adaptation in the industry, to financing adaptation projects. For example, our sustainability improvement loans link a client’s interest margin to the improvement of their ESG score or specific key performance indicators, or KPIs. These KPIs can support climate adaptation efforts, such as water and wastewater management or energy reduction initiatives.
- Risk to Opportunity: supporting society.
Climate change has had a profound impact on human rights, such as the right to life, to food, and water. It is often the case that those who are most impacted are those who are already vulnerable. That’s why we aim to engage with businesses that can contribute to societal adaptation through infrastructure, technology, or innovation.
For example, in 2021 ING acted as sole sustainability advisor in a financing package to build the UK’s first new reservoir in a generation, ensuring water resilience in the region for the next 80 years. The borrower is one of the six water-only companies in England and Wales, providing clean drinking water to about 750,000 people. KPIs covered environmental and social factors such as water leakage, supply interruptions, carbon reduction, biodiversity and affordability.
Adaptation measures can sometimes have adverse human rights impacts. For instance, building a hydroelectric dam to regulate floods in lowlands might be effective in reducing the hazards resulting from floods. However, it may simultaneously restrict access to land and forest resources for people upstream. Our Environmental and Social Risk (ESR) policy framework and human rights policy consider a variety of human rights risks when assessing corporate clients and transactions. We recognise that as new adaptation technologies and practices develop, we need to continuously examine the potential adverse human rights impacts. For more information, read our stance on human rights.
3. Thought leadership
We aim to improve our understanding of what defines an effective adaptation solution. We closely follow existing guidance on financing climate adaptation, such as the EU taxonomy. However, we also note that unlike mitigation, there are no standard definitions or metrics of what counts as adaptation, as it depends on climate change scenarios and location-specific risk tolerance.
ING has endorsed the UNEP FI Physical Risk and Resilience Statement, committing to issuing climate-related physical risk disclosures. We’re actively working towards a more comprehensive and robust physical climate-related risk assessment approach. For instance, over 2021 and 2022, we performed a qualitative physical assessment on our Wholesale Banking portfolio and improved our understanding of the physical risk impact of climate events on our mortgage and underlying assets under different climate scenarios and time horizons. For more information, read our 2022 Climate Report.