Embedding science into the process of evaluating risk and return is the fundamental premise of green finance, and is at the heart of our mission at the Green Finance Institute.
As the latest science points to an acceleration of the impacts of climate change, in particular with respect to sea-level rise, there is an increasing urgency to reflect the realities of physical climate risk into our global infrastructure plans, and the financial investments that underpin their development.
The Coalition for Climate Resilient Investment launched today at the UN Climate Action Summit seeks to transform mainstream infrastructure investment. The Green Finance Institute is pleased to be playing a key role in this exciting new coalition. We look forward to supporting the creation of new resilience tools and standards and also leading the development of innovative financial instruments to mobilise capital towards the resilient infrastructure needed to withstand the emerging climate risks that the scientific consensus so clearly forecasts.
This coalition, led by the private sector is a first of its kind. Read below, the comments of coalition Chair, John Haley, CEO, Willis Towers Watson.
From the devastation wrought by hurricane Dorian on the Bahamas and the summer heatwaves in the northern hemisphere, to drought in India and cyclone Ida in Mozambique; the climate crisis is well and truly upon us, impacting vast swathes of humanity and hitting the most vulnerable the hardest.
Images of flattened homes, parched reservoirs, flooded roads or deluged airports hit the headlines on a weekly basis. They are all stark reminders that our current infrastructure, across the globe, is not robust enough to deal with violent or unpredictable weather. This is especially true for low and middle-income countries which are most vulnerable to the extreme effects of climate change.
In economic terms, we’re already paying. Companies are estimating a potential US$250 billion in lost assets because of climate change, while $1 trillion is at risk over the next five years, with the financial services industry accounting for 80% of that exposure, according to the Carbon Disclosure Project.
Building resilience
Individual companies are already feeling the full force of the effects of climate change. Take, for example, the bankruptcy of Pacific Gas & Electric in the US, which was held liable for billions of dollars in damages from California’s wildfires. This shows us how climate change is creating real material financial risks which threaten company balance sheets.
Until now, most activity tackling the global climate crisis has been focused on mitigating its effects by focusing on greenhouse gas emissions. Meanwhile, efforts to protect society from the growing frequency and severity of climate impacts are clearly lagging.
If we don’t invest heavily in climate resilient infrastructure right now and adapt our transport networks, housing and businesses, we are unlikely to future-proof our communities for the decades ahead and counteract the flooding, heatwaves, drought, cyclones, wildfires, and other extreme climate events.
Informed decisions
When it comes to infrastructure, one of the biggest challenges is pricing physical climate risk into investment decisions. It’s a global issue and a real systemic failure of markets around the world. Physical climate risk is often mispriced and there’s also a lack of transparency and understanding around climate-related impacts.
Yet investors, lenders and insurers and ratings agencies all need this vital information if they are to make informed financial decisions. Investing in climate resilience may cost a little extra upfront, but it will deliver more sustainable infrastructure in the long-term.
For example, if investment for a new bridge in a monsoon-prone region of India is more robust, is positioned and engineered with climate change in mind and is built as a low-carbon structure, it is more likely to survive and thrive into the next century. Informed decisions like these need to be made. Unfortunately, one major challenge we face is the lack of tools and analytics that allow us to quantify the capital investments needed to make these decisions.
This is why Willis Towers Watson has spearheaded the new Coalition for Climate Resilient Investment. Launched at the UN Climate Action Summit on 23 September, the Coalition represents 34 companies and organizations with more than US$5 trillion in assets, including support from the World Economic Forum and the UK and Jamaica governments.
This Coalition is the first of its kind private sector-led initiative in resilience, bringing together different industries and leaders across the finance and investment value chain to develop practical solutions to advance climate change resilience. This new coalition realizes that current efforts to adapt to physical climate risks and deliver resilience for exposed assets and communities is severely lacking and needs to be urgently addressed.
The focus is on the $90 trillion that is earmarked globally for infrastructure up to 2030. The big question is, how much of it will be built with climate resilience in mind? The lack of climate risk standards has resulted in an inefficient allocation of capital when it comes to the protection of assets from physical climate risks.
The good thing is that we are now rapidly developing consistent analytical tools and metrics – the technology is scaling up, and so are the data sets – to better understand climate risk, even at the local level. This will enable us to effectively quantify it, price it and in the process, mitigate future human and financial disasters. Already there is a systematic shift in thinking.
That’s because there is increasing pressure from all stakeholders, from investors to rating agencies, banks to governments, insurers to engineers, to do this right now. No one wants unquantified risk on their books and de-risking investments is vital. This issue is now firmly on the C-suite agenda as well.
Pricing the risks posed by climate change will create opportunities to build a network of resilient infrastructure in high-, medium- and low-income countries, enabling us to better prevent future disasters.
Opportunities
Willis Towers Watson and others also see that pricing climate risk will create new opportunities. There is already a higher demand for transparency, while improved data analytics and societal pressure will ultimately lead to mandatory disclosure of climate risks. It is only a matter of time before it sits at the center of all decision-making processes.
The cost of embedding physical climate risk into pricing is not great compared to the returns. An average of 3% additional upfront capital investment is required to build resilience into infrastructure, yet every dollar invested in resilience generates four dollars of economic value.
Climate resilience standards and pricing will also allow the mobilization of capital to where it’s needed the most. It could even help the mitigation agenda, since any investment will also need to take this into account.
With better analytics vulnerable geographies will also be able to attract the right kind of investments and prevent capital flight as climate risks will be accurately priced into infrastructure projects.
It goes without saying that we are delighted to support the formation of a new Coalition for Climate Resilient Investment. There is a huge opportunity here to build resilience. The time is now.