Executive Summary
Reducing carbon emissions will not be enough on its own. According to newly released projections from the NGFS, even under a net-zero transition scenario, global GDP is expected to shrink by 8% compared to a baseline without climate change, an economic toll more severe than previously estimated. The latest estimates (Phase 5) show that the net-zero pathway would lead to an additional 6% GDP decline compared to Phase 4 projections, resulting in USD1.24trn in extra global economic losses by 2050. In Europe, for example, under the most ambition transition scenario, cumulative flood-related damages could reduce household disposable income by approximately USD107,000, with disproportionate effects across countries. Developing economies face a significantly higher toll from extreme weather events, both in human and economic terms. While 71% of reported disasters occurred in developed countries, 91% of fatalities were in developing nations due to weak infrastructure and limited early-warning systems. Least Developed Countries (LDCs) and Small Island Developing States (SIDS) have experienced severe financial devastation due to climate change, with some disasters wiping out over 100% of GDP. These losses underscore the growing risks of climate impacts and highlight the urgent need for adaptation measures alongside mitigation efforts.
Yet, adaptation finance remains severely underfunded. By 2030, the annual demand for adaptation funding is projected to reach USD387bn. But only USD63.5bn was mobilized as of 2022, leaving a massive USD323.5bn shortfall. This funding gap puts millions at greater risk of climate disasters. Furthermore, the limited adaptation finance available was distributed unevenly, revealing deep regional disparities in access to critical resources.
The insurance gap is also a critical challenge in climate adaptation, with developing economies facing particularly severe underinsurance. Countries like China and India have alarmingly high insurance gaps of 94% and 93%, respectively, leaving nearly all disaster-related economic losses uninsured. This is closely linked to their low insurance penetration rates (China: 1.2%; India: 0.6%). But while developed economies have much lower gaps, thanks to well-established insurance markets and financial safeguards, coverage fluctuates depending on disaster severity and preparedness.
In the face of escalating climate risks, the public sector holds a central role in advancing adaptation efforts, not only as a regulator and financier, but also as a catalyst for private sector engagement. By guiding infrastructure development, shaping urban planning and deploying targeted fiscal policies, governments can reduce climate vulnerability and foster long-term resilience. A critical strategy in this effort is the use of blended finance, which strategically combines concessional public funding with private capital to channel investment into adaptation projects that may be perceived as too risky or unprofitable. This approach enables public resources to de-risk investments, making them more attractive to institutional investors and unlocking essential financing for climate resilience initiatives.
Expanding insurance coverage is essential for enhancing climate resilience across both developed and developing economies, but strategies must be adapted to local conditions. In developed countries, national insurance schemes are key to managing climate-related risks by pooling exposures across various hazards and asset types, thus offering broad financial protection and promoting long-term stability. Government-backed insurance pools in particular help maintain access to coverage in areas where private insurers face difficulties in offering affordable policies for natural catastrophes. For instance, the US has established prominent public insurance mechanisms such as Florida’s Citizens Property Insurance Corporation and the Florida Hurricane Catastrophe Fund for windstorm risks, as well as the California Earthquake Authority for seismic events. These programs illustrate the potential of publicly supported insurance to address challenges around affordability, risk concentration and financial sustainability in the face of growing climate threats.