Post date 11 May 2026 (original LinkedIn date)
Original LinkedIn version· 1,501 words
“The Tipping Point“ by Tears for Fears, released in 2022 on the album of the same name.
Today I want to build on Sarah Kapnick’s Climate Intuition piece on tipping points and Ron Dembo’s put-option framing developed at riskthinking.ai. Kapnick’s piece on tipping points landed on a truly arresting number: a $30 flood today is worth $1,600 in present value if a tipping point hits in year 15. Not to be outdone, the put-option response from Dembo that followed added a second number that deserves more attention than I suspect it has been given, namely the sum of roughly $3,000 in capital carry over the same window.
Stack them and the CFO’s number isn’t $1,600. It’s closer to $4,600, and about two-thirds of that is capital tied up right now, it’s not simply in damages that might show up later. That ratio, capital carry running roughly 2:1 against expected losses, isn’t a quirk of the flood example, rather it’s structural, and once understood, the climate-adaptation conversation changes shape.
Why capital carry dominates expected losses
A brief intro for non-finance peeps: the Modigliani-Miller theorem (1958) states that a firm’s capital structure ie how it finances operations through debt or equity, does not affect its overall market value in perfect markets. Developed by Franco Modigliani and Merton Miller before even I was born, it suggests that with no taxes, bankruptcy costs, or asymmetric information, the weighted average cost of capital (WACC) remains constant regardless of debt levels.
In a frictionless Modigliani-Miller world, holding capital is costless and adaptation value collapses to the avoided expected loss - this is Kapnick’s $1,600. But in reality, no regulated institution lives in that world. Capital carries a wedge made up of:
regulatory minimums under Basel and Solvency II
costs of financial distress that scale with leverage
the lemons premium on raising equity precisely when you would most need it
tax asymmetries between debt and equity service
Climate adaptation creates value through both the physical-damage channel that climate models naturally emphasise, and the capital-frictions channel that they almost never price. So what this put-option framing is really getting at is this: in a world of binding capital constraints, the second channel (capital frictions) can be the bigger one. That’s why the carry term shows up at twice the size of the loss term in Kapnick’s flood example, and why we should expect it to do the same in most realistic balance-sheet exposures.
Three value channels, behaving differently
Once you decompose where adaptation value actually shows up, the ‘spread and premium benefit’ line splits into three components that move on different clocks:
1. The financing channel: Lower debt spreads, better access to sustainability-linked instruments, smaller climate haircut in covenant calculations. Realised continuously and highly sensitive to the disclosure regime - TCFD- and ISSB-aligned reporting determines whether the market can price the adaptation at all. Adaptation done well but reported badly captures very little of this benefit.
2. The insurance channel: Lower premiums, but more importantly, maintained insurability. In a growing list of markets, parts of Florida, California, coastal Australia, the relevant question isn’t “what’s the premium” but “is coverage available at any price”? That makes this channel partially discontinuous, so that small adaptation differences can flip an asset from insurable to uninsurable, with step-function consequences for value, finance-ability, and disposability.
3. The asset-value channel: The climate-risk discount the market applies to the underlying property or portfolio. Shows up in mark-to-market, transaction value, and the haircut applied when the asset is pledged as collateral. For anyone who might ever sell, refinance, or post the asset, this channel is large and immediate.
These don’t simply add: the financing benefit partially depends on the insurance and asset-value benefits being recognised by capital providers, which depends on disclosure being good enough for them to see. The channels reinforce each other, but only when the adaptation is credible to outsiders.
The basis-risk problem
A put option hedges a specific underlying, just as a seawall hedges tidal flooding. It does not hedge heat stress on workers, supply-chain disruption from a port closure 800 miles away, or, increasingly relevant, insurance-market dislocation that prices coverage out of reach regardless of your specific protection.
Real climate exposures must be seen as bundles. The put-option framing is cleanest when the adaptation maps directly to a single hazard and gets messier the more your exposure looks like a portfolio of correlated risks. For most balance sheets, that means the cleanly priceable adaptations, a seawall, a backup-power install, a relocation, are all a subset of total adaptation needs. The rest sits closer to portfolio insurance than to a single named put and needs to be valued accordingly. Pls don’t think that this is a critique of the put framing; it’s simply a reminder of its limitations. The seawall in Kapnick’s example is a clean hedge, but in reality the next adaptation decision on the same balance sheet probably isn’t.
The timing question that the put framing underweights
Dembo formulates a decision rule: act when waiting costs more than acting, which is absolutely right in spirit, but again arguably worth taking further. Adaptation capex is largely irreversible, and the arrival of a tipping point is uncertain in both timing and magnitude. That’s the classic Dixit-Pindyck setup, and it generates real-option value in waiting ie information arrives, costs may fall, your specific exposure may change. Hence the standard finance instinct is to wait.
Tipping points break that symmetry. You cannot retro-adapt after a threshold is crossed. The post-tipping flood doesn’t pause while you build your seawall. So the optimal-timing equation has to balance two opposing forces: the option value of waiting for information, against the conditional probability that waiting forecloses the option to adapt at all.
The cleanest formulation maybe says something like ‘act when the marginal value of additional information falls below the marginal probability of losing the ability to act on it’. For most climate hazards, the second term is rising, which pushes optimal timing earlier than a CFO with no climate frame would set it. The put framing surfaces the carrying cost; the real-option framing tells you why wait-and-see is more dangerous here than in most capital decisions.
The full equation
The adaptation business case that we started with (avoided expected losses + spread/premium benefit − capex – maintenance) becomes, with the put-option extension and the channels properly decomposed:
avoided expected losses + capital-carry relief + financing-spread benefit + insurance access value + asset-mark uplift − capex − maintenance − option value of waiting (where it still applies)
Most adaptation business cases include the first term and the last two. Kapnick’s piece nails the first and Dembo’s put-option response surfaces the second. The middle three are where the discussion could go next, because that’s where the bulk of the value sits for any institution that funds itself in capital markets, which, let’s be honest, is most of them.
What changes for the CFO
The headline reframing isn’t really about climate; rather it’s about which conversation adaptation belongs to. A long-dated, fuzzy hedge against uncertain future damages doesn’t compete well for capital against this year’s other top priorities. However, a near-term capital-efficiency trade does. The put-option frame, properly extended, converts climate adaptation from the first thing into the second and it does it without needing anyone to agree on the climate science beyond what their own regulators and rating agencies already assume.
The risk is real and the carrying cost is potentially eye-wateringly large. This is about a shift from future damage to capital that is actually tied up now. The window in which adaptation remains an option at all is finite … and shrinking. That to me feels like a conversation a CFO can and should act on.
References
Kolson Hurley, A. (2026) “The US military is quietly preparing for climate change,” Bloomberg Green Daily
Sullivan, B.K. (2026) “Wildfires Race Across US as Drought Spans Half the Nation,” Bloomberg, 9 April. Available at: https://www.bloomberg.com/news/articles/2026-04-09/wildfires-race-across-us-as-drought-spans-half-the-nation
Hessel, M. (2026) Water: The Next Structural Bottleneck, Daily Insight, Absolute Strategy Research, 14 April.
Absolute Strategy Research (2026) ASR Climate Macro - Drought, Wildfires and Insurance Loss, internal note, 16 April.
Dunne, D. and Gabbatiss, J. (2026) “How wildfires and storms drove insurance losses in 2025 – in three charts,” Carbon Brief, 31 March. Available at: https://www.carbonbrief.org/how-wildfires-and-storms-drove-insurance-losses-in-2025-in-three-charts/
Swiss Re Institute (2026) sigma 01/2026: Natural catastrophes in 2025 – the persistent rise of wildfire and storm risk, Zurich, 19 March. Available at: https://www.swissre.com/press-release/Wildfires-storms-floods-contribute-to-record-92-of-global-insured-losses-in-2025-says-Swiss-Re-Institute/7b39b1a5-b878-4a55-a5ff-bf5aa561a675
Joy, F. (2025) “Three types of drought – and why there’s no such thing as a global water crisis,” The Conversation, July. Available at: https://theconversation.com/three-types-of-drought-and-why-theres-no-such-thing-as-a-global-water-crisis-260723
Gagkas, Z., et al. (2023) Assessment of Natural Capital Asset Exposure to Current and Future Meteorological Drought, Report D21d/D23c. James Hutton Institute
US National Interagency Fire Center (2026) National Significant Wildland Fire Potential Outlook, April. Available at: https://www.nifc.gov/nicc-files/predictive/outlooks/monthly_seasonal_outlook.pdf
World Economic Forum/OECD figures on the global water investment gap (as cited in ASR, 2026).