[Edaily Marketin, Reporter Soyoung Park ] Massive floods struck Nepal last August. It is estimated that more than 1,400 people died and over 5,000 are missing. As climate-related disasters grow increasingly severe, the importance of investing to mitigate damage in advance is also rising in global capital markets.

However, in the domestic capital market, funds allocated to address climate change are relatively concentrated in sectors that reduce greenhouse gas emissions, such as solar and wind power. Industry experts advise that, for investment in climate disaster prevention to increase, a financial framework must first be established to translate economic benefits into investment returns.

According to the domestic investment banking (IB) industry on the 12th, climate-related alternative investments in the domestic capital market are primarily directed toward “mitigation” sectors aimed at reducing greenhouse gas emissions, such as solar and wind power.

An official from the capital markets sector noted, “Investments in sectors aimed at mitigating climate change can secure cash flows, such as interest and dividends, from specific projects or companies,” adding, “This is an area where funds are being steadily injected into the domestic capital market as well.”

Currently, domestic institutional investors—including pension funds, mutual aid associations, insurance companies, and banks—are providing funding for renewable energy projects. The investment structure is designed such that when a power generator establishes a special purpose company (SPC) to raise funds, investors supply the capital needed for capital expenditures (CAPEX) in the form of equity or loans.

Investors can secure interest and dividend income based on the cash flows generated from these projects. Furthermore, by expanding their renewable energy investments, they can benefit from meeting green transition and ESG-related investment goals.

However, in South Korea, the climate change “adaptation” sector has yet to firmly establish itself as an alternative investment destination. This is because it is difficult to establish a profitable business model. This is largely because investments in adaptation are primarily aimed at reducing the direct damage caused by disasters—such as floods, wildfires, and droughts—in advance or preventing damage in specific regions.

An industry official described the situation, saying, “It is unclear who would benefit from preventive services when a disaster has not yet occurred, and it is difficult to determine who should bear the costs.” The official added, “There are barriers to private capital investment, so there is a strong reliance on public budgets.”

Recently, as the government has emphasized balanced regional development, policy funds have been allocated to expand regional investment. However, the industry believes it is unlikely that these funds will be directed toward adaptation investments.

An official from a domestic asset management firm engaged in infrastructure investment explained, “For example, when investing in an offshore wind power project, we look at factors such as the scale of the project and which regional factories supply specific equipment needed for the project.”

Impact investment industry insiders believe there are limits to addressing climate disasters with public funds alone. This is because not only do disasters require massive recovery costs, but it is also difficult for public budgets to cover the infrastructure and technological development needed for prevention.

Some in the industry are proposing performance-based financial models, such as Social Impact Bonds (SIBs), as a way to attract private capital to the field of climate disaster prevention. Under this model, projects to prevent wildfires or floods are implemented in a specific region, and the resulting reduction in damage is measured. The public sector then provides compensation based on whether the desired outcomes were achieved.

In addition, strategies involving the use of charitable funds, catalytic capital, and venture capital (VC) to conduct initial proof-of-concept (PoC) testing are being discussed. The argument is that a phased investment approach is needed to subsequently attract large-scale private capital, such as from infrastructure investors.

In fact, startups have emerged that are developing technologies to mitigate climate change, such as AI-powered flood prediction, wildfire detection cameras, and water pipe leak detection systems. There is growing consensus that a financial framework is essential to transform the technologies they develop into sustainable, profitable businesses.

An official from a domestic VC firm specializing in impact investing stated, “Ultimately, the key question is whether technologies and systems designed to prevent or reduce the damage caused by climate disasters can be transformed into viable business ventures,” adding “To create a framework where investments can be made and capital recovered, we also need a connecting link that brings together various stakeholders, including △ philanthropy (charitable funds), △ venture investors such as accelerators (ACs) and venture capital firms (VCs), △ infrastructure investors, and △ public institutions,” the representative advised.