The author would like to thank Liew Tzu Mi, Kim Kee Bum, Chris Wong, Tan Yong Hwee, Amelia Campbell, Trang Chu Minh, and Shaggy Herur for their valuable feedback and contributions to this article.

Climate change is real and its impact is already felt today. Natural catastrophes drove around US$220bn of global economic losses in 2025. The Los Angeles wildfires alone accounted for US$53bn in damages, the costliest wildfire event on record1. In the US, comparing 1980-2000 with 2001-2024, the average frequency of climate disasters has almost tripled, while their annual costs have nearly quadrupled (Exhibits 1 and 2).

On current policies, climate scientists expect global warming to reach +2.8°C above pre-industrial levels by 2100, almost double today’s warming of +1.4°C2. Climate disasters and associated costs are already rising at alarming rates, but extreme weather will become more frequent and severe than what we experience today.

The implication for investors is clear. Climate change depends on physics. Physical risks accrue regardless of political or market sentiment, and they cut two ways: they are exposures we must underwrite, and they are the demand driver behind an adaptation opportunity set whose growth is anchored in the same physics.

Transition risks, arising from the world’s shift to a low-carbon economy, are different in character: they are cyclical, ebbing and flowing with financial markets, policy, and the economics of green technology. It is precisely this cyclicality that makes the transition so easy to misread in the short term.

Long-term investing requires looking past these swings to understand how both types of risk affect investments and where they open new opportunities. Yet clarity of direction is not enough. Investing in a structural theme requires two things: identifying its long-term direction and assessing where the theme sits within the market cycle (Exhibit 3).

History shows that even the most transformative structural trends move through cycles. The US railway mania of the 1870s-80s, the electricity boom and bust of the 1900s-30s, and the dot-com era of the late 1990s-2000s each reshaped the real economy, while passing through pronounced swings of exuberance and retreat.

Sustainability is no different. The shift toward a more sustainable, climate-resilient global economy is inevitable, even if the path there is uneven. The recent volatility and cooling sentiment reflect the short-term ebbs and flows that have accompanied every major structural transition.

Reading the transition cycle—what markets, policy, and technology show

The direction of physical risk is not in doubt—the science and the loss data are clear, and it will intensify regardless of sentiment. The questions are centred on the transition: how fast, how far, and where the economics hold.

To gauge where transition risk sits in the cycle, we anchor on data and empirical evidence, examining three forces that drive it—financial markets, policy on the ground, and green technology economics—which together point to a transition that is uneven and cyclical, yet structurally intact.

What are financial markets saying

Global clean energy stocks—iShares Global Clean Energy ETF (ICLN)—have outperformed the MSCI All Country World Index (ACWI) by 29 percentage points since 1 January 2025 (Exhibit 4), despite a softening of policy support in some markets. While higher interest rates weighed down clean energy share prices from 2022-2025, recent AI-driven electricity demand has served as a positive catalyst, lifting the outlook for all forms of energy, and creating favourable conditions for clean energy to pick up. This is why understanding where we are in the cycle is important for investors.

Pragmatism over policy

Growing AI power demand is requiring quicker time to market, which solar energy and batteries can fulfil, but fossil fuels cannot (Exhibit 5). California, Texas, and Florida are the leading solar power producers in the US, indicating energy deployment is bipartisan and driven by economics (Exhibit 6).

In the EU, sentiment towards green policies has cooled in parts of the region. On the ground, however, the share of wind and solar in the EU’s power generation continues to rise and now comprises 21% of the region’s total electricity generation (Exhibit 7). Energy security and affordability have been as important in driving renewable energy as the sustainability agenda.

Green technology continues to make strides in power but faces greater challenges in other sectors

Globally, the cost of renewable energy has fallen over the past five years, making it increasingly cost-competitive with fossil fuels, such as coal and gas (Exhibit 8). Regional nuance, however, matters. In China, solar, onshore wind, and energy storage now offer superior cost economics relative to coal and gas. In the US, solar and energy storage are cheaper than coal but remain more expensive than gas, owing to the country’s access to abundant, low-cost natural gas (Exhibit 9).

Beyond the power sector, however, decarbonisation remains challenging worldwide. Green steel production pathways are still less cost-competitive than traditional blast furnaces (Exhibit 10), though recent developments in China are showing early signs of promise: its recent 15^th Five Year Plan sets industrial decarbonisation as a longer-term objective with explicit key performance indicators (KPIs) for provincial officials, making the plan enforceable rather than aspirational3. In aviation, sustainable aviation fuel currently costs around four times as much as conventional jet fuel (Exhibit 11).

Green technology costs, however, are only one part of the picture and falling costs do not always translate into profitable businesses. In China, for instance, intense competition among solar equipment makers led to an oversupplied market and depressed profit margins in 2024-25 (Exhibit 12).

This underscores the need for caution: rapid cost declines can erode pricing power and compress returns just as quickly as they expand a market, so a favourable technology or demand outlook is not on its own sufficient. Careful attention to industry structure, competitive dynamics, and the durability of margins is essential to distinguish businesses that can convert technological progress into sustained, profitable growth from those that cannot.

The other side of physical risk—adaptation as an investible opportunity

The world must prepare for a harsher climate. Adaptation will need to scale across society to strengthen the resilience of economies and communities to physical climate risks. Governments, businesses, and households all need ways to manage more extreme heat, floods, droughts, and storms. Companies that provide these solutions will play an increasingly important role in helping economies and communities thrive as physical risks intensify.

In our May 2025 research paper4, produced with Bain & Company’s support, we estimated that global annual revenues from a select set of adaptation solutions will grow from US$1tn today to US$4tn by 2050 in our Base Case. The corresponding investment opportunity across public and private debt and equity is estimated to rise from US$2tn today to US$9tn by 2050, of which US$3tn is incremental growth attributable to global warming.

Critically, the size of that opportunity proved largely resilient to the climate pathway that ultimately unfolds, varying only around 4% across projections, which means investors can build conviction here without having to forecast the precise climate outcome.

Three features make this opportunity set distinctive.

A different risk profile: mature businesses, not technology bets

The adaptation universe consists of many companies that are already profitable, with proven products, established customers, and functioning distribution. Weather-resilient building materials, water infrastructure, industrial cooling, and drainage are not venture propositions awaiting a cost-curve breakthrough. Relative to parts of the transition opportunity set, the investment case therefore carries materially less commercial and technology risk: the question is not whether the product works or whether it can reach cost parity, but how quickly demand compounds and whether the industry structure allows that demand to be captured profitably.

Climate elasticity of demand: an under-appreciated source of revenue upside

What changes for these businesses in the years ahead is not their technology, but their demand curve. As physical hazards intensify, the climate elasticity of demand—the degree to which demand for a product responds to worsening climate conditions—should accelerate revenue growth beyond historical trends. It could also lift margins, since climate-resilient variants of established products typically carry higher gross margins than their standard equivalents.

This upside remains poorly reflected in consensus forecasts. Most financial planning and analysis teams and sell-side analysts continue to rely on historical data for forecasting, and this information gap presents long-term investors with an opportunity to invest where company earnings may positively surprise as demand for adaptation solutions increases. Our own estimates put adaptation revenues by 2050 as much as 61% above historical trend-based forecasts5.

The corporate side of this gap is beginning to close. Across 2026 quarterly earnings calls, management teams in several adaptation-exposed sectors have begun attributing a positive demand outlook to climate-driven demand. Building products companies point to tightening regulatory and insurance requirements driving demand for more durable offerings; power equipment firms report stronger demand for backup generation as extreme weather disrupts grids6.

Policy that ratchets rather than reverses

Perhaps the most underrated distinction is policy durability. Transition policy is more exposed to the electoral and budgetary cycle, as changes to the Inflation Reduction Act (IRA) and the shift in European sentiment discussed above illustrate. Adaptation policy behaves differently. Building codes, flood-zone requirements, and resilience standards are typically revised after a damaging event, and rarely loosened. The direction of travel is largely one-way, which gives the demand signal a stickiness that transition-linked demand often lacks. At the macro level, the number of countries and economies with national adaptation plans in place has accelerated markedly (Exhibit 13).

While the adaptation opportunity set is attractive, two cautions apply. First, inevitability of demand is not the same as attractive valuations. A widely recognised structural theme can still be expensive, and the discipline around industry structure and margin durability is critical. Second, few companies are pure-play adaptation businesses; most derive only a portion of revenue from climate-driven demand, so the work lies in isolating and distinguishing genuine climate elasticity from ordinary construction or infrastructure cyclicality.

That said, we have begun to see revenues at companies with adaptation exposure decouple somewhat from the housing cycle—an early indication that climate-driven demand may prove more durable than the construction cycle it is typically associated with (Exhibit 14).

Responding to the evolving sustainability landscape

As climate change creates more risks and opportunities for our portfolio, sustainable investing means acting on three fronts:

• Investing in the energy transition: We deploy capital to decarbonisation solutions and credible transition opportunities where the economics make sense, and the investment case can withstand policy changes. In practice, this means tracking a range of energy transition opportunity sets and assessing each for attractive relative value and staying power.
• Proactively managing rising physical risks: On current trajectories, the shift towards a net-zero economy is unlikely to move quickly enough to prevent material changes to the climate and environment. This exposes investments to real physical risks in the near and long term, which we will monitor and underwrite appropriately.
• Positioning for adaptation and resilience opportunities: We actively track and adjust our exposures as this opportunity set expands, with a focus on identifying where climate elasticity of demand is real, durable, and not yet in the price. The key revenue catalysts we are watching include policy tightening and physical risk visibility, especially through building codes, insurance repricing, and corporate resilience mandates.

Sentiment toward sustainability will keep swinging, while physical risks will continue to mount. Both realities run through the three fronts above, and they share one discipline: separating a theme’s structural direction from its cyclical position. For investors and businesses, that means reading cooling sentiment as a signal about near-term pricing rather than long-term direction, and treating physical risk as both an exposure to underwrite and a source of opportunity.