All of this has given rise to climate adaptation, a sector that aims to mitigate against and adapt to the risks associated with climate change.

For James Brennan and Navjit Sagoo, two of the scientists behind climate risk analytics startup Climate X, it is imperative that adaption efforts go hand in hand with those working to curb rising temperatures.

“Whilst it is impossible to know the precise nature of how climate risks will manifest in the future, it is clear that there will be significant need to both mitigate and adapt to, the hazards that will arise,” the pair said in an email.

Adaptation has been tipped to eat up more of the capital invested into climate in the coming years. Indeed, Bank of America analysts predicted the climate adaptation industry would be worth $2 trillion a year by 2026.

Despite this, adaption currently receives less than 10% of climate investments, at $46 billion, per the Climate Policy Institute. And while most people live in cities, only 5% of adaptation funding goes to cities, per a different report by the organization.

Now, new data shows just how costly climate change could become to cities. Heat and floods could cost London and New York City a collective £511.5 million, around $646 million, on average every year by 2030, according to data provided exclusively to Business Insider by Climate X.

Founded in 2020, London-based Climate X sells its data to asset managers and financial institutions so they better understand their exposure to climate risk. It is backed by fintech specialist CommerzVentures, proptech fund A/O, and Deloitte, having raised $12 million in investment, per PitchBook.

“Governments are recognizing that it’s a huge cost now, and they haven’t budgeted for this,” said Abrar Chaudhury, senior research fellow and program director at the University of Oxford’s Saïd Business School, where he focuses on climate finance and adaptation.

The cost of not staying cool

Rising temperatures also have an impact on productivity, particularly in the likes of factories, warehouses, and aviation, The New York Times reported in July. In cities, the dropoff in productivity can become more pronounced due to the urban heat island effect, where metropolitan areas are warmer than the surrounding rural settings because buildings trap heat.

In 2020, extreme heat-induced productivity loss in the commercial sector cost London £108.5 million and New York City £102 million, according to the data from Climate X. That bill could increase to £203.5 million and £117.5 million in 2030, respectively, without adaptation measures.

Installing air conditioning systems, or HVAC, would cost £438.5 million and £89 million, respectively, giving London a 26% return on investment and New York 113%. Return on investment was calculated over a 10-year period.

Climate X made its calculations based on the UN’s Intergovernmental Panel on Climate Change’s RCP8.5 scenario, which has been deemed to be a “very high” baseline for emissions. The startup also only included flood losses in cases of flooding greater than 0.3 meters with a return period of greater than one in 10 years. In addition, structural damage from heat, like buckling, was not included. Climate X only tallied reductions in productivity in commercial settings.

Greater attention has been paid to heat in recent years. The US’ Extreme Heat Emergency Act of 2023, which has been introduced but not yet passed, would allow local governments to take action during extreme heat events, while UK think tank the Fabian Society has called for a new law introducing a maximum indoor working temperature.

Extreme heat could have a knock-on effect across the economy: sweltering homes could mean a shift back to the office, driving up rental costs for well-ventilated spaces and subsequent energy bills, as well as more consumer traffic more broadly.

HVAC, however, is a catch-22. Climate X’s outcomes did not consider HVAC as a bad feedback loop, but in reality, it can be. It’s incredibly power-hungry and often uses environmentally-damning coolant, meaning it’s both a solution and a contributor to the climate problem. Indeed, air conditioning accounts for nearly 4% of annual global greenhouse gas emissions, per a 2022 study.

Startups are trying to change that.

California-based Mojave is one such company. It has developed an air conditioning system that slashes the energy and refrigerant use by simplifying the way traditional systems work and making theirs smaller, thus more precise, it previously told BI.

Berlin’s Autarc, Massachusetts-based Conduit Tech, and North Carolina’s Phononic are also working on the problem by developing coolant alternatives, better ways to design and install HVAC systems, and thermoelectric chips to control temperature without refrigerants.

VC investment in such companies peaked in 2021 at $877.4 million, according to PitchBook. Bill Gates’ Breakthrough Energy Ventures, impact fund SOSV, and Goldman Sachs Asset Management have backed companies in the space.

Nature-based solutions like urban forests and green space in cities are also a way to beat heat. In Medellin, Colombia, green corridors have helped to reduce temperatures by 2 degrees Celsius across the city.

Keeping heads above water

Floods have been thrust into the spotlight in recent years after devastating events around the world, including in Europe.

Surface flooding occurs when heavy rainfall overwhelms a city’s drainage systems or the ground’s ability to absorb and channel water away, as opposed to river or coastal flooding.

It cost London £23 million and New York City £118.5 million in productivity loss in the commercial sector in 2020, per Climate X. That could increase to £31 million and £159.5 million in 2030, respectively. Adaptation measures — introducing sustainable urban drainage systems (SUDs) — would cost £7.5 million and £18 million, giving London a 350% return on investment and New York 762%.

SUDs, an umbrella term for water management systems, provide the highest return on investment in both cities of the adaptation levers assessed by Climate X.

They can take various forms depending on the local context and challenges. For example, a £14 million effort to channel rainwater into the river Thames is underway in one London borough using landscaping and underground pipes. Meanwhile, a ditch filled with permeable crates, like those bottles are transported in, and paved over with breeze bricks can hold a huge amount of water and reduce flood risk.

SUDs can include urban swales, wetlands, and basins designed to absorb and store water, which also supports biodiversity when not in use, as well as permeable paving such as gravel, said Tucker Landesman, a senior researcher at the International Institute for Environment and Development.

But VC-backed companies tackling flooding tend to be disaster preparedness and response tools. They range from those helping to design more sustainable cities to those helping in the aftermath of events.

Take Norwegian software platform 7Analytics, a flood risk data and analytics startup that models surface water to help planners design more resilient cities. The platform was cofounded by geologist Helge Jørgensen after working as a land-use planner himself and expanded to predict landslides and other natural hazards last year. The company has raised $3.8 million in investment as well as an undisclosed round, according to PitchBook.

All hands on deck

The need for climate adaptation is clear but often overlooked until an extreme weather event occurs, according to Landesman and Chaudhury. Until recently, it was also considered an issue for emerging and developing economies, Chaudhury added.

A bevy of policies are now driving it, such as the EU Taxonomy, where businesses must disclose climate risk and adaptation investments.

Climate X’s customers are willing to pay because it benefits them in the long run as climate risk begins to be priced into asset valuations, the company said.

“This also has a direct bearing on the insurability of these properties, with those that are vulnerable to physical risk seeing increased premiums and, in the more severe circumstances, entirely uninsurable. This is a key consideration to ROI when firms decide to invest in or lend against these properties,” Brennan and Sagoo noted.

“This is a time for all hands on deck. Roof bracing, heat pumps, and SUDs are all part of the toolbox that we need, but we really need to think about urban transformation if we’re serious about adapting to climate change in the long run,” added the International Institute for Environment and Development’s Landesman.