How might investors identify companies that are developing or delivering products and services designed to help society withstand the impacts of a warming planet?
One answer may be to find firms engaged in the business of climate adaptation and resilience, suggests an analysis by the Global Adaptation and Resilience Investor (GARI) working group and the MSCI Sustainability Institute. Researchers from GARI and the Institute used artificial intelligence to spot companies in every industry that are selling data, technologies or equipment that can help governments, businesses and households prepare for and adapt to the realities of a changing climate.
Products and services from more than 800 publicly listed companies (about 11% of listed companies globally) contribute to climate adaptation and resilience, finds the analysis, which used an AI large language model (LLM) to surface companies whose businesses span activities ranging from water-efficient agriculture and supply-chain resilience to weatherization of power infrastructure and buildings.[1]
The analysis follows guidelines outlined in a framework for investment in climate adaptation and resilience developed by GARI for use by institutional investors across asset classes, companies, sectors and regions. The framework, developed with support from the Bezos Earth Fund and ClimateWorks Foundation, arrives as investors are increasingly turning their attention to growing demand for technologies and solutions designed to protect society and natural ecosystems from the physical risks of climate change.[2]
Unlike decarbonization, which looks to combat climate change by reducing and eliminating greenhouse gas emissions, adaptation and resilience aim to improve society’s ability to prevent, prepare for, and adapt to climate hazards, as well as to rebuild better after climate-related damages. Think early monitoring systems to predict floods or wildfires, efficient air conditioning to better cope with heatwaves, drought-resistant seeds and water-efficient farming, materials for retrofitting buildings so they better withstand extreme weather, or insurance against catastrophic weather disasters.
“Adaptation and resilience, which has been an important theme for policymakers, public finance and NGOs, is emerging as a theme for growth-minded investors, who understand the inevitable demand for innovative resilience-oriented products and services,” notes Linda-Eling Lee, the Institute’s founding director. “We’ve set out to identify a set of adaptation and resilience companies that investors might care about. The approach we’ve demonstrated, which uses a machine to do the work of an army of equity analysts, yields a first cut of an investable universe.”
The threats of a changing climate have continued to rise even as a growing number of investors align their strategies with the goal of reaching net-zero by reducing the emissions associated with their investments. The U.S. alone registered a record number of billion-dollar disasters in 2023, which marked the hottest calendar year on record globally.
The costs of climate adaptation for developing countries could be 10 to 18 times higher than current flows of about USD 21.3 billion, the United Nations estimates. Average global temperatures are on track to rise between 2.5°C and 2.9°C (4.5°F to 5.2°F) above preindustrial levels depending on whether countries fully implement their climate targets. Listed companies could see their costs of adapting to extreme heat quadruple, to USD 4 trillion, if average global temperatures were to rise 3°C (5.4°F).
Among companies contributing to climate adaptation and resilience that the Institute has identified, roughly 58% are in the industrials and materials sectors, compared with 22% of listed companies in the MSCI ACWI IMI (Exhibit 1).[3] Twenty-eight percent (about 231 companies) are listed in developing- and emerging-market countries, highlighting that a sizable share of the investment opportunity may be in the Global South (Exhibit 4).[4] The businesses span a series of industries.
Adaptation and resilience companies by size and sector
The interrelationship of resilience and decarbonization makes both climate mitigation and adaption possible themes for investors. Information and analytics that sharpen understanding of the risk of wildfires, for example, may also inform the speed of investments in decarbonizing the electricity grid. “Since even ambitious mitigation will not eliminate all future climate risks, tackling climate change also requires a level of adaptation to those impacts that cannot be avoided,” analysts at JPMorgan have observed.[5]
At the same time, most frameworks for climate transition finance focus primarily on reducing emissions. Few outline activities that help with adaptation and resilience, while those that do tend to focus regionally or are oriented toward fixed-income instruments.[6]
Behind the scenes
To identify adaptation and resilience companies from the universe of listed companies, researchers from the Institute and GARI asked Open AI’s GPT-3.5 Turbo 11 questions and used the company’s GPT-4 to assess the answers (Exhibit 2). The analysis asked the LLM to identify adaptation- and resilience-related products and services based on abbreviated business descriptions contained in the companies’ latest annual reports.
Exhibit 2: Is this company in the business of climate adaptation and resilience?
Source: MSCI Sustainability Institute and GARI
- Does this company contribute to improving the ability of clients/customers to understand and manage climate-related risks and disasters proactively?
- Does this company provide products/services to assist clients/customers in preparing for and preventing physical climate risks?
- Does this company enhance the ability of clients/customers to respond effectively to physical climate risks and disasters during adverse conditions?
- Do this company’s products or services support clients/customers in coping and adjusting to adverse climate conditions in real time?
- Does this company contribute to the recovery process from adverse physical climate impacts?
- Does this company provide strategies or solutions to help alleviate the adverse impacts of climate events and facilitate a ‘build-forward better’ approach?
- Do this company’s product/service contribute to adaptation or resilience against chronic climate-related risks, such as extreme heat, extreme cold, wind gusts, heavy rain, and heavy snowfall?
- Do this company’s product/service contribute to adaptation or resilience against acute climate-related risks, such as tropical cyclones, coastal flooding, fluvial flooding, river low flow, and wildfires?
- Is this company actively involved in developing products or solutions for climate-resilient infrastructure, including challenges related to water management, coastal issues, and urban planning?
- Is the primary focus of this company’s products/services centered on adjusting to both current and expected effects of climate change?
- Do the products/services of this company primarily work on reducing greenhouse gas emissions or preventing their release into the atmosphere?
The researchers engineered the prompts to enable the LLM to explain its yes or no answer, as well as manually reviewed answers for accuracy, relevance, specificity, consistency and clarity. Though the analysis anonymizes companies identified, they include firms whose revenues reflect varying levels of resilience-related products and services (Exhibit 3).
Exhibit 3: A sample of adaptation and resilience companies (anonymized)
Source: MSCI Sustainability Institute and GARI
| Industry | Description | Estimated share of revenue from adaptation and resilience products in 2022 | Where listed/ market value |
|---|---|---|---|
| Technology | A multinational company that offers products and services related to building and industrial automation, energy solutions, and aerospace technologies. Adaptation solutions include air purification systems, air quality monitoring devices, refrigerants, power grid resiliency, and Internet of Things urban communication networks | 18% | New York Stock Exchange (USD 122 billion) |
| Pharmaceuticals | A multinational company with adaptation solutions that include medication and research and development on vaccines, drugs and treatments to prevent and combat the spread of known and emerging diseases that warming temperatures and extreme weather events may exacerbate. Also invests in respiratory health medication to mitigate the impact of air pollution. The company does not delineate product-level revenues. | 20% | New York Stock Exchange (USD 77 billion) |
| Manufacturing | Business segments include manufacturing of semiconductors, automotive parts, medical devices and environmental monitoring and measuring equipment. Adaptation solutions include water and air quality measuring devices. | 2% | Tokyo Stock Exchange (USD 3.5 billion) |
The result is a universe of companies that by definition invites further analysis by both researchers and investors. That includes contextualizing the companies’ resilience-related products within their respective businesses based on research that goes beyond the descriptions that companies themselves have included in their annual reports. It also includes overlaying the information with investors’ respective investment policy mandates to short-list companies suitable for a possible investment universe. Both these steps are outside the scope of the analysis conducted by GARI and the Institute.
Asset managers whom the Institute and GARI consulted in connection with the research observed, for example, that fixed-income instruments might be easier to categorize than equities as centered on adaptation and resilience because the proceeds from bonds can be ring-fenced. The hypothetical universe might also be whittled down, they noted, by limiting consideration to companies at which adaptation and resilience solutions constitute a financially material share of revenue or operations.
The LLM’s ability to identify the investable universe could be sharpened as well. Researchers, for example, could supply it with company sustainability reports and other documents that may augment the understanding of companies’ businesses gleaned from their annual reports alone. By engineering the model to parse a larger body of data, researchers could reinforce the reliability of its answers.
By design, investors can tailor the Institute’s approach to align with their unique criteria. “Future research can enhance our findings,” says Umar Ashfaq, the Institute’s U.S. research director.
Resilience companies are heavily clustered in the North American and APAC regions
[1] Listed companies represented by the MSCI ACWI Investable Market Index (IMI), which captures large, mid and small cap representation across 23 developed markets and 24 emerging-market countries and covers 99% of the global equity investment opportuity set.[2] See, for example, “Adapting to a warmer planet. Why climate change investing isn’t just about decarbonization.” JPMorgan Asset Management, January 2023, and “Climate resilience: an emerging investment theme,” BlackRock Investment Institute, December 2023.
[3] Sectors and industries from the Global Industry Classification Standard (GICS®) jointly developed by MSCI Inc. and S&P Global Market Intelligence. The GICS® structure comprises 11 sectors, 24 industry groups, 69 industries and 158 sub-industries.
[4] MSCI evaluates global equity markets annually to determine whether they should be classified as a developed, emerging or frontier. The market classification framework considers three criteria: a country’s economic development, the size and liquidity of its equity market, and accessibility. Please see the MSCI Market Classification Framework (June 2023), available at msci.com.
[5] See note 2
[6] See, for example, “Designing a Climate Resilience Classification Framework,” Climate Bonds Initiative and the U.N. Office for Disaster Risk Reduction, 2023
