Global Energy Transition Spending Is Behind and Adaptation Spending Is Becoming Mandatory

For a decade, climate investing was framed as an ESG choice. It’s now increasingly a recurring capex and opex line required to keep assets operable, insurable, and compliant. On the mitigation side, the energy transition is not being built fast enough to match the 2050 commitments governments and companies keep repeating. On the adaptation side, we’re already spending to defend people and assets against extreme weather and the bill rises sharply as warming rises. One is lagging. The other is becoming unavoidable.

The transition is underbuilt and that creates a financing gap

The uncomfortable transition reality is simple: deployment is behind the pathway implied by Paris-aligned 2050 targets. In McKinsey’s framing, across seven major energy-system domains, only about 13.5% of the low-emissions technologies required had been deployed by end-2024, and progress is running at about half the pace required on average. Some domains are moving, notably, low-emissions power and electric mobility. Others lag badly, especially hard-to-abate industry, hydrogen and large-scale carbon management.

Either the world accelerates buildout, which means more sustained spending on generation, networks, storage, efficiency, new fuels, and carbon management, or targets drift into fiction while the physical system continues to run on legacy assets longer than planned. The closer you get to political deadlines with insufficient buildout, the more likely you are to see policy compression, subsidy redesign, procurement mandates, and disorderly repricing.

Adaptation is the parallel story

Mitigation is about changing the system. Adaptation is about surviving the system we’re actually getting. At today’s warming, global spending on adaptation to protect people and assets against extreme weather is roughly $190 billion a year at current protection standards. McKinsey’s analysis suggests that simply maintaining those standards in a 2°C world requires around 2.5 times that spend. Matching developed-economy protection standards globally pushes the number toward roughly $1.2 trillion annually, with a large portion tied to air conditioning and irrigation. They also argue benefits can outweigh costs by about seven to one.

Adaptation is not a niche theme. It’s a rising operating requirement for cities, utilities, logistics networks, buildings, agriculture, and public health. It will get funded one way or another through a mix of public budgets, tariffs, insurance premiums, and user payments. The only real uncertainty is how investable the cash flows become.

Two capex streams, one portfolio reality

A hotter climate increases peak electricity demand, which strains grids, which increases the need for firming capacity, storage, and grid upgrades. Heat and water stress change where people can work and live, which changes real estate, industrial location decisions, and municipal credit risk. Extreme weather increases downtime risk, which pushes demand for resilient logistics, hardened data infrastructure, and redundancy that looks expensive until it isn’t. So you end up with one broad phenomenon: rising demand for long-dated physical investment with complicated risk, but clear physical necessity.

What are the different investable corridors

1) Networks that make decarbonisation usable

Networks decide whether any of it works. That means transmission and distribution expansion, grid digitalisation, monitoring and stability tech, storage and flexible capacity that turns intermittent power into reliable supply, and efficiency retrofits that reduce load growth cheaply. It’s less glamorous and often more durable, but it’s exposed to regulation, tariff politics, and payment discipline.

2) Hard-to-abate industry and the compliance wallet

If heavy industry decarbonisation is lagging, that doesn’t mean it goes away. It means the capex gets deferred until it becomes urgent. The corridor includes process changes in cement, steel, and chemicals, industrial efficiency and waste heat recovery, carbon measurement, reporting, and verification infrastructure, and carbon management where it becomes bankable. This corridor is sensitive to carbon pricing, procurement rules, and border measures.

3) Adaptation infrastructure

Adaptation is investable when someone has to pay, and when performance and maintenance are enforced. That includes flood control and drainage, coastal and river defenses, water treatment, reuse and distribution resilience, and drought mitigation and irrigation upgrades. These assets can be stable when structured properly. They can also be graveyards of overruns and political interference when they aren’t.

4) Cooling, cold chains, and heat resilience

Cooling is the adaptation megatrend nobody loves talking about because it sounds unsexy and increases power demand. The corridor includes district cooling and efficient building systems, cold chains for food and pharma, workplace cooling retrofits, and urban heat mitigation designs tied to real estate and municipal planning.

Bottom line

Energy transition spending is behind schedule, and that increases the odds of compressed timelines and disorderly repricing. Adaptation spending is becoming mandatory because heat, water stress, and extreme weather are no longer future risks. As a result, we are going to see a multi-decade build-and-defend cycle across grids, storage, industry, cooling, water, and resilient infrastructure.

Chief Brand & Investor Relations Officer

Sneha Dadrwal

Frequently Asked Questions

Q: Why does “behind schedule” matter for investors?

A: Because lagging deployment often leads to policy compression, procurement mandates, and sudden repricing. Slow progress doesn’t mean calm progress.

Q: Is adaptation really investable or is it mostly government spend?

A: It’s both. Many projects are public-led, but private capital becomes relevant when cash flows are structured through tariffs, user payments, availability payments, or corporate offtake-like contracts.

Q: What’s the biggest mistake investors make in climate real assets?

A: Assuming physical need guarantees returns. Payment mechanisms, maintenance discipline, and regulatory behavior decide returns.

Q: What should an India-focused allocator do differently?

A: Treat heat, water, and grid stability as core underwriting variables, not externalities. Build portfolios that survive tariff politics, delays, and extreme weather hitting the asset itself.

Sources

McKinsey