The heat waves, typhoons, floods and wildfires we’re seeing right now are a sobering reminder: we are living with a changing climate, and it’s affecting communities, businesses, and natural environments all over the world. New research shows how this is a threat to economic growth and wellbeing.
While much of the public debate focuses on cutting emissions, a report, “The Macroeconomic Case for Investing in Climate Adaptation” by James Rising, Nick Godfrey, Paul Watkiss, Swenja Surminski, Daniela Baeza Breinbauer, María Paula Gutiérrez-Hurtado and Maria João Pimenta, calls for attention to similarly be placed on ensuring adaptation is financially viable.
Swenja Surminski, Professor in Practice at the Grantham Research Institute on Climate Change and the Environment at LSE and co-author of the report, says while cutting emissions remains non-negotiable, it is no longer enough on its own. There is an equally urgent need to strengthen resilience to the climate impacts we can no longer avoid. “Reducing emissions is essential — full stop,” she says. “But it’s not a substitute for adaptation. We don’t get to choose between cutting emissions and adapting to their impact. The climate change that’s already locked in demands both.”
“We use the term climate adaptation to refer to actions that reduce the damages caused by climate change or help people, businesses and economies prepare for and cope with its impacts,” she explains.
“These adjustments can include the construction of resilient infrastructure, the implementation of nature-based solutions, the use of early warning systems, and the deployment of disaster risk financing instruments – wide ranging possibilities that demand rapid policy attention.
“This has now become urgent because the physical impacts of climate change are already materialising and intensifying,” says Surminski. “Our report shows these impacts are no longer a distant risk: they are already affecting economies today and are expected to grow significantly without stronger adaptation efforts.” In other words: we are living with a climate that our infrastructure, our buildings, our business and investment practices, our farming and supply chains were not designed for.
Climate change influences entire economies and financial systems – not just localised hot spots.
Climate change is a macroeconomic challenge
The report argues that climate change should be no longer be viewed solely as an environmental issue. Instead, it is a macroeconomic concern.
“Our findings demonstrate that physical climate risks can affect the core drivers of economic performance: growth, productivity, inflation, employment, and public finances. It is therefore a macro critical issue, with impacts already felt in many parts of the world,” continues Surminski.
Extreme weather events such as floods, droughts, storms and heatwaves can disrupt economic activity directly, while longer-term temperature increases can gradually reduce productivity and increase financial risks.
According to the report, climate impacts can lower labour productivity, contribute to higher inflation and unemployment, and place growing pressure on public finances through rising expenditure and reduced tax revenues. They can also affect sovereign credit ratings and increase borrowing costs. “In other words, climate change influences entire economies and financial systems – not just localised hot spots – making it a central concern for economic policy.”
Despite this, climate considerations are not yet fully embedded in economic decision-making. A 2025 survey of 59 finance ministers conducted by colleagues at GRI for the Coalition of Finance Ministers for Climate Action found that only one in four ministries of finance reported analysing public expenditure and financing needs for adaptation and resilience.
Adaptation is not just about preventing damage – it can also actively support economic development and wellbeing.
How climate change could reduce incomes and economic growth
By synthesising nearly 300 studies and more than 6,000 individual estimates, the report creates what the authors describe as the most comprehensive macroeconomic assessment of physical climate risks and adaptation currently available. This work was carried out in partnership with the Coalition of Finance Ministers for Climate Action and is part of a global effort to document the evidence of the returns on resilience investment and how decision-makers can take action to reap these dividends.
This breadth of evidence allows researchers to move beyond isolated sectoral studies and examine economy-wide impacts. It also increases confidence in the findings because different datasets and research methods consistently point to similar conclusions.
One of the report’s most significant findings is the scale of potential economic losses if adaptation efforts do not increase. The researchers estimate that by 2050, climate change could reduce global GDP per capita by between three and 15 per cent under plausible warming scenarios. The impacts would not be evenly distributed. Low-income and lower-middle-income countries are expected to face the largest losses, with GDP per capita reductions of between eight and 18 per cent, and some countries potentially facing losses exceeding 20 per cent.
However, the report also highlights a striking limitation in the existing evidence explains Surminski: many studies focus on individual risks, such as temperature increases, while overlooking wider economic disruptions, tipping points and cascading effects between sectors.
“Crucially, the report highlights that even this extensive evidence base is likely to underestimate the true scale of impacts,” says Surminski.
The economic benefits of climate adaptation
While the report paints a stark picture of physical climate risks, it also finds strong evidence that adaptation investments generate substantial returns.
Effective adaptation can include climate-resilient infrastructure, improved water and agricultural management systems, urban cooling strategies, disaster preparedness measures and reforms that strengthen financial resilience. “The evidence shows that such investments can deliver strong returns, with benefit–cost ratios of around 4:1 on average,” Surminski continues. “In lower-income countries, where climate impacts are often greatest, returns can be even higher, with median benefit-cost ratios reaching 5:1.”
Some interventions stand out as particularly cost-effective. Early warning systems have benefit-cost ratios of around 6:1, while resilient infrastructure investments achieve ratios of around 5:1. In many cases, the benefits can exceed costs within only a few years.
“Importantly, adaptation is most effective when it is early, strategic, and integrated into broader development planning, rather than reactive or piecemeal.”
Economic decision-makers, particularly finance ministries, need to plan for changing physical climate risks.
Understanding the “triple dividend” of adaptation
The report argues that adaptation should not be viewed simply as a defensive response to climate threats. If done smartly adaptation can generate benefits beyond avoiding or reducing losses.
“The ‘triple dividend’ framework that I developed with colleagues from ODI and the World Bank a few years ago captures three types of benefits that can arise from adaptation,” explains Surminski: “One: avoid losses, for example reducing damage from climate shocks. Two: economic gains from adaptation action, boosting productivity, investment, and growth. Three, social and environmental co-benefits, such as improved health, ecosystems, and quality of life.”
A case study from Brazil – which faces growing climate risks, including heatwaves and potential degradation of the Amazon rainforest – illustrates this principle. Adaptation measures, such as ecosystem restoration, sustainable land-use practices and watershed rehabilitation can strengthen resilience while also reducing emissions, improving water quality, generating health benefits as well as offering livelihoods for locals if designed and implemented with their needs in mind.
“This means adaptation is not just about preventing damage – it can also actively support economic development and wellbeing, giving locals an economic perspective in the face of a changing climate.”
What finance ministries should do next
For policymakers, the implications are clear: climate risk must become part of mainstream economic planning.
“Our findings imply that economic decision-makers, particularly finance ministries, need to plan for changing physical climate risks,” says Surminski
The report recommends integrating climate risks into fiscal and macroeconomic planning, strengthening analytical capacity, embedding adaptation into national development strategies and mobilising both public and private finance. This is particularly important in the face of tight fiscal space. “The key message is that adaptation should be seen not as a cost, but as a strategic investment that supports economic stability, reduces risk, and promotes long term development.”
The report shows different approaches already in practice in some countries such as incorporating climate considerations into debt sustainability assessments, the development of long-term resilience strategies and prioritization of “no-regret” investments that deliver benefits under a wide range of future climate scenarios.
As climate impacts continue to intensify, the authors conclude that adaptation is not an optional add-on to climate policy. It is an economic necessity.
Research for the World is the online magazine by LSE – The London School of Economics and Political Science.
