- Exposure to climate risk is rising sharply but unevenly across hazards and regions. Global warming continues to accelerate, with 2025 the third-warmest year on record, reinforcing warnings that the +1.5°C threshold could be reached as early as 2030. As a consequence, global natural catastrophe losses have risen roughly fourteen-fold since 1970, reflecting intensifying hazards and rising exposure as urbanization, asset concentration and populations expand in risk-prone areas. Risk is increasing unevenly across hazards and regions: flood exposure is rising fastest in Southeast Asia, the Middle East and North Africa; wildfire exposure has grown markedly in North America; heat stress is expanding across Africa and Asia and drought risk remains concentrated in already water-stressed regions.
- The sharp increase in uninsured losses poses a growing risk to public finances and adaptation spending should triple to be commensurate with the needs. While the share of uninsured losses has remained broadly stable, their absolute scale has increased sharply as climate damages rise, leaving a growing volume of losses unprotected and hundreds of millions without effective financial coverage. Protection gaps exceed 80% in several major economies, including Mexico, South Africa, Italy, India and China. Governments often absorb part of these losses through ad hoc support, but reliance on such measures risks shifting rising climate liabilities onto public balance sheets and increasing fiscal pressures. Large extreme-weather events have been found to worsen fiscal balances by between 0.2% and 1.1% of GDP, though average impacts on EU and OECD economies have been more limited due to stronger institutions and broader insurance coverage. At the same time, insurers are transferring climate risk to capital markets through catastrophe bonds, with issuance reaching record levels in 2025 and supported by strong investor demand, raising questions about the financialization of climate risk in the absence of scaled adaptation and public risk-sharing. Adaptation expenditure represents a form of preventive fiscal policy. However, current combined public and private sector spending in Europe stands at approximately 0.3% of GDP, well below the estimated requirement. Projections indicate that investment would need to triple to 0.9% of GDP to adequately address adaptation needs across the EU-27 and the UK, corresponding to an additional EUR67.5bn in annual expenditure.
- Mobilizing capital for climate adaptation at the required scale remains constrained by a set of deep structural barriers. Fiscal space in many European economies is limited, restricting the public co-investment needed to crowd in private finance. Policy frameworks remain fragmented across jurisdictions, creating regulatory uncertainty that discourages long-term private commitments. Investment cases for adaptation are underdeveloped: projects often lack bankable structures, established track records and the financial modelling that institutional investors require. Compounding this, physical climate-risk disclosure remains inconsistent, data on adaptation outcomes is scarce and, unlike mitigation, the benefits of adaptation are context-specific and difficult to measure and verify. Together, these frictions make adaptation an opaque and commercially challenging asset class for private investors. Addressing these barriers requires action across multiple fronts: agile and coordinated policy frameworks, stronger project pipelines, improved risk-sharing mechanisms, better data infrastructure and more robust investment cases. Within this broader agenda, classification and transparency are foundational – investors and governments cannot coordinate effectively around an asset class they cannot clearly define or track.
- A shared taxonomy of climate adaptation would provide a critical first step by establishing a common language, reducing ambiguity and making adaptation spending more visible in financial markets. This would help the private sector identify investment opportunities, support the development of new financial instruments and limit greenwashing and “adaptation-washing”. We develop a taxonomy of 61 adaptation measures, drawing on and consolidating existing frameworks, and classify them according to their underlying economic and financial characteristics – particularly the extent to which benefits can be monetized and captured by private actors. This yields a differentiated mapping of financing modalities: 38% of measures are primarily public, notably large-scale infrastructure and system-level resilience; 23% are primarily private, concentrated in scalable, innovation-driven segments such as cooling technologies and climate analytics and 39% fall into public–private territory, highlighting the central role of risk-sharing mechanisms. Importantly, these shares reflect the distribution of adaptation measures, not the allocation of investment volumes, which vary significantly across activities and remain difficult to quantify consistently. Rather than providing a capital split, the taxonomy offers a structural framework to understand investability and guide the respective roles of public, private and blended finance.