Category: Finance

New study: Companies around the world are vastly underestimating climate change risks to their business

New study: Companies around the world are vastly underestimating climate change risks to their business

By Anna Haworth

A new study, published this week in the journal Nature Climate Change, analysed disclosures from more than 1,600 global companies and found that many companies are failing to accurately characterise their climate change risk or adequately prepare for its physical impacts.

The study, authored by Conservation International and CDP, was based on responses to CDP’s annual climate change questionnaire, which asks companies to report on climate risk management strategies.  The study represents the first comprehensive analysis of climate risk reporting across multiple industries and sectors of the global economy.

Companies are recognising and reporting physical climate risks – from droughts, floods, cyclones, and changes in precipitation patterns and in average and extreme temperatures. Two-thirds of risks identified were viewed by companies as ‘more likely than not’ or ‘virtually certain’ to occur, and more than half of companies said that they expect climate change to increase their costs or disrupt production capacity.

Company strategies for managing the impacts of climate change were sorted by the researchers into three categories: ‘soft’ strategies, such as conducting risk assessments and updating emergency response plans; ‘hard’ approaches that involve capital investments in technology or infrastructure, such as flood control and air conditioning; and ecosystem-based adaptation, such as grasslands restoration, sustainable agriculture and forestry, or conservation of coastal ecosystems.

Types of adaptation strategies being reported by companies, divided into soft, hard and Ecosystem-based Adaptation (EbA). The size of the circles represents their relative use overall.

The most common approach to climate change, employed by 39% of companies, involves a mixture of soft and hard strategies. One third of companies use soft strategies only. Notably, 18% of companies did not disclose any adaptation strategy for the physical climate risk identified.

The researchers state that “companies’ disclosures on climate risk reveal a preference for incremental or reactive adaptation strategies.” Companies are retaining the language of risk management and “too often translate the complex challenge of climate change into solutions that align with business-as-usual practices.”

The study finds that while many companies are trying to incorporate climate change into their risk management practices, five key ‘blind spots’ are preventing businesses from adequately preparing for its impacts:

  1. The magnitude and costs of physical climate change risks. Of the companies surveyed, which represent 69% of global market capitalisation, they are collectively underreporting climate risks to investors by at least 100 times. This reflects the fact that a large number of companies do not report financial impacts and those that do, are probably underestimating them.
  2. Climate change risks and adaptation strategies ‘beyond the fenceline’. Despite evidence that climate change will have wide-ranging impacts for businesses, most companies have focused their adaptation strategies on a small set of impacts to direct operations, not taking into account supply chain, customer, employee, and wider societal impacts.
  3. The potential for Ecosystem-based Adaptation (EbA). The huge win-win potential of ecosystem conservation, restoration and sustainable management, to both reduce the physical impacts of climate change and deliver other co-benefits, is largely being ignored.
  4. The costs of adaptation. Only a limited number of companies are reporting the up-front cost of climate change adaptation measures. These are largely framed in terms of ‘management costs’, which do not necessarily represent additional expenditures on adaptation. Few companies are calculating the return on investment, the relative cost effectiveness of different strategies, or the cost of doing nothing. The near-absence of these cost comparisons limits investors’ ability to understand or assess the strategy against available alternatives.
  5. Nonlinear climate risks and the need for radical change. Most corporate adaptation strategies assume that climate change risk is basically linear. But science increasingly suggests the existence of ‘tipping points’ – such as sudden permafrost thaw, ice sheet loss, or Amazon forest die-back – that could lead to more abrupt changes and severe risks to businesses and society as a whole. The authors conclude that “radical adaptation for radical change, it seems, is not yet part of the business agenda.”

The study closes on a more positive note, stating that these barriers to improved disclosure and ultimately better climate change adaptation strategies are not insurmountable. The authors highlight that corporate governance structures matter for climate change reporting. Furthermore, mandatory reporting requirements and standardised performance indicators would facilitate more transparent and robust reporting. The 2017 Task Force on Climate-related Financial Disclosures (TCFD) recommendations has provided impetus for companies to report the financial implications of climate risks and many companies are now reporting in-line with these recommendations. In 2018, CDP has also aligned its reporting with the TCFD recommendations, meaning that companies can more clearly communicate their risks and management approaches to their investors and customers. Finally, in cases where adaptation action offers benefits for multiple actors and become ‘public goods’, new partnership models may be required to enable costs to be shared, both with other companies and with governments.

Goldstein, A., Turner, W., Gladstone, J. and Hole, D. (2018). The private sector’s climate change risk and adaptation blind spots. Nature Climate Change. (paywall)

Cover photo by Lieut. Commander Mark Moran, NOAA Corps, NMAO/AOC (CC BY 2.0): Views of inundated areas in New Orleans following breaking of the levees surrounding the city as the result of Hurricane Katrina. September 11, 2005.
Australian companies not disclosing climate risks properly at risk of legal challenges

Australian companies not disclosing climate risks properly at risk of legal challenges

By Elisa Jiménez Alonso

Recent research has concluded that while Australian companies are increasingly aware of the need to disclose their climate risks, the majority are failing to demonstrate strategies to actually do so – this could lead to legal challenges.

To complete this research, Market Forces analysed the public disclosures of the 74 ASX100 companies (as of July 2018) that operate in sectors highlighted by the Taskforce on Climate-related Financial Disclosures (TCFD) as facing the highest levels of climate risk.

According to Market Forces companies are now disclosing more detailed discussions of the risks and opportunities they face from climate change. But only 12% of them have disclosed detailed analyses of how their business will cope under different climate scenarios. Even fewer have actual plans to reduce their emissions.

Of the 74 analysed companies only 3, South32, AGL, and Stockland, were found to disclose in line with all the TCFD recommendations. Commonwealth Bank, BHP, Westpac and ANZ each come close to fully satisfying the recommendations while Macquarie and Mirvac are among the companies that have committed to addressing all recommendations in their 2019 reporting.

These findings are especially important since Australian regulators are increasing their scrutiny regarding climate risk disclosure. A recent report by the Australian Security & Investments Commission (ASIC) found many companies were actually breaking the law by failing to adequately consider and disclose climate risk.

According to Market Forces, This is perhaps unsurprising, given legal warnings that companies and their directors must consider climate change risks and disclose all material business risks.

However, regulators need to clarify what specific climate-related disclosures are required of companies operating in even the most exposed sectors and also mandate a TCFD-compliant climate risk reporting for all companies operating in ‘high risk’ sectors, as well as financial institutions.

Read about Acclimatise’s work on assessing physical climate risks and opportunities with UNEP FI and 16 commercial banks by clicking here.

Cover photo by Holger Link on Unsplash
Majority of companies in Scotland say climate change a risk to business

Majority of companies in Scotland say climate change a risk to business

by Georgina Wade

A study, commissioned by the World Wide Fund for Nature (WWF) Scotland, found that nine in 10 large companies in Scotland believe climate change poses a risk to their business.

The October poll indicates that 85% of large businesses and SME’s in Scotland say they want the Scottish Government to be a global leader in tackling climate change. The finding comes just after the release of an IPCC report warning that we have 12 years to limit climate change.

Additionally, the Bank of England only recently declared that banks and insurance companies will be required to appoint a senior manager to take responsibility for protection from climate change risk.

Responding to the poll’s findings, Dr Sam Gardner, acting director at WWF Scotland, said:

“These findings make it clear climate change is no longer a concern of a few ‘green’ businesses. Climate change poses many chronic and severe risks to our planet’s natural and financial systems. The best way for Scotland to minimise the threat posed by climate change and maximise the opportunities arising from our response is for Scotland to continue to take a world-leading role, as businesses across Scotland clearly seem to understand.”

Matt Lancashire, Scottish Council for Development and Industry director of policy, believes that Scotland’s transition to a low-carbon economy is a great opportunity for the Scotland’s economic growth.

“Our renewable energy sector has generated sustainable economic growth and created thousands of high-quality jobs, directly and in an extensive supply chain, while also reducing emission and making the air we all breath cleaner.”

The survey of 300 Scottish businesses was conducted by Censuswide on behalf of WWF Scotland and included 150 businesses with over 250 employees and 150 SME businesses.

Cover photo by Adam Wilson on Unsplash
UK government fails to make climate risk reporting mandatory

UK government fails to make climate risk reporting mandatory

By Will Bugler

In a move that was branded “disappointing” by the Environmental Audit Committee (EAC), the UK government has resisted calls to make it compulsory for large companies to report their exposure to climate risks. The move leaves the UK lagging behind France, which passed a law mandating climate risk reporting for big business in 2015.

Companies are facing increasing pressure from investors and shareholders to report their climate risk exposure, which is likely to have a significant bearing on future performance. The UK Government’s decision to rely on voluntary reporting instead was presented in its response to the EAC’s report on green finance – which had urged the government force businesses to disclose their climate exposure.

“It is disappointing that the Government has not used this opportunity to follow France in making it mandatory for large companies and asset owners to report their exposure to climate change risks and opportunities.” Said EAC Chair Mary Creagh MP.

The governments decision is at odds with the prevailing sentiment of investors. The Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) has built considerable momentum behind the need to disclose climate information as part of companies’ financial reporting. Over five hundred companies have publicly expressed their support for the TCFD’s recommendations.

Major banks are also taking steps to understand climate risks. Sixteen of the world’s leading banks, the UN Environment Finance Initiative, and Acclimatise recently published new methodologies to help banks understand how the physical risks and opportunities of a changing climate might affect their loan portfolios.

“The physical impacts of climate change may pose a risk to banks’ loan portfolios.” said Acclimatise’s Chief Technical Officer, Dr Richenda Connell. “Once banks understand the scale of the risks, this will be a milestone that will encourage other corporates to take climate risk management seriously. Building resilience to physical climate impacts also presents banks with investment opportunities. Those that understand this best will have a competitive advantage.”

More needs to be done to encourage businesses to understand and respond to climate risks and opportunities. Recent research from the Asset Owners Disclosure Project, shows that while awareness is rising about climate change, almost ninety percent of assets managed by the world’s largest public pension funds have not been subjected to a climate risk assessment.

In the UK, the Department for Work and Pensions (DWP) has admitted that there is little understanding amongst trustees on the scale of fiduciary duties that are related to climate and environmental risks.

Download a copy of the ‘Navigating a new climate’ report from here.

Access the webinar recordings by clicking here.

Cover photo by bilaleldaou/Pixabay (public domain).
Event: Methodologies and tools to evaluate the financial impact of climate-related risks and opportunities

Event: Methodologies and tools to evaluate the financial impact of climate-related risks and opportunities

On 16 November, the Fondazione Eni Enrico Mattei will be hosting a workshop on methodologies and tools to evaluate the financial impact of climate-related risks and opportunities in Milan, Italy. Acclimatise’s CEO John Firth will be participating in a round-table discussion bringing together firms and investors to discuss their respective views on climate-risk disclosure and expectations on the associated financial impacts.

Visit the event website by clicking here.

Background to the event

As the demand for disclosure of climate related risks and opportunities scales up in the financial sector, firms are responding by implementing reporting frameworks following guidelines like the Recommendations set out by the Task Force on Climate Related Financial Disclosures (TCFD).

To improve the quality and transparency of climate information sought by investors, firms are looking for effective methodologies to improve their evaluation of the financial impacts of climate change in the medium/long run. Think-tanks and research centres have already begun elaborating and testing systems to reach these objectives, particularly for what concerns the energy transition risks and the physical risks related to climate change.

Through the participation of high-level international experts, the workshop will present some of the most interesting instruments and methods in this field. The workshop will also present the British approach to implementing the recommendations of the TCFD within the national disclosure guidelines, with the purpose of representing a valuable lesson for the Italian firms. The final session will discuss the role of the information that results from these tools for firms and investors.

The DeRisk-CO project, developed at FEEM, aims at mapping and evaluating such methodologies, so as to stimulate a scientifically founded debate on the relevance of disclosing climate information, and to give valuable insights for Italian businesses. This workshop is part of a series of events promoted by the Italian Sustainable Investment Forum (ItaSif) within the SRI week.

Putting a price on resilience

Putting a price on resilience

By Matthew Savage

Policymakers, investors and practitioners implementing resilience projects, strive to achieve the greatest impact for their investment.

However, estimating the benefits arising from a project aimed at increasing resilience is difficult. The Asian Development Bank’s (ADB) Urban Climate Change Resilience Trust Fund (UCCRTF) is working to put a price on the urban resilience benefits of the bank’s infrastructure loans and technical assistance programs.

Quantifying the economic benefits of resilience at the city-level can help drive new investments in infrastructure, improve the efficacy of urban development and planning, and demonstrate the benefits of existing resilience strategies. However, it is a task that is fraught with challenges. So how can we begin to put a value on urban resilience?

Investing in climate resilience at the city level can significantly reduce the social and economic costs of climate change for vulnerable communities. Resilient infrastructure also underpins the shift towards more efficient and better functioning cities and can encourage wider economic development and growth. However, limited access to finance and the increasing threat of climate change mean it is important to identify and prioritize those investments likely to offer greatest value for money.

The socioeconomic benefits of resilience can arise from both hard investments in resilient infrastructure (e.g. improved drainage, flood protection, access roads, storm shelters) as well as from climate-smart planning approaches (e.g. improved land use and zoning policies). These, in turn, can give rise to a range of benefits associated with reduced economic costs of climate change. Examples might include reduced damage to buildings and property, lower levels of injury and loss of life, and avoided loss of incomes and livelihoods.

Breaking new ground

Several previous studies have sought to value the costs and benefits of investing in resilience.  These studies cover a range of sectors and draw from the fields of both climate change adaptation and disaster risk reduction. They generally report positive benefit-to-cost ratios (BCRs) with economic returns usually at least 3 times those of the original investment and some projects delivering BCRs of up to 50:1.

However only a few of these studies are directly relevant to the urban context (for example those relating to urban flood management, set back zones, and cyclone shelters). Such studies tend to be far fewer in number than those for other sectors (e.g. agriculture, social protection).  In addition, only limited analysis has been undertaken on the benefits of improved resilience planning and capacity on economic outcomes. What evidence exists is also often derived from developed country contexts.

While urban resilience incorporates benefits associated with both climate change adaptation and disaster risk reduction, it also incorporates wider set of economic benefits (spillover effects) associated with improved urban planning and function, and positive linkages to livelihoods and growth. Greater overall economic resilience can underpin the ability of impacted communities to cope with and respond to external shocks and stresses.

The value of pricing resilience

While delivering resilience can often be achieved by integrating principles in urban planning and development, it often requires new investment compared to a business-as-usual scenario. This may include building additional infrastructure (such as embankments to protect against changes in flood levels) or upgrading the specification of existing infrastructure to meet higher climate thresholds (such as raising road levels or increasing drainage).

Putting a price on resilience to ensure value for money is therefore a central focus of the UCCRTF.  This involves not only understanding the costs of UCCRTF investments (and their additionality from a climate perspective), but also the benefits of these investments in terms of averting the economic damages associated with climate change.

These insights create value for the UCCRTF itself and help assess the effectiveness of the program. They also extend the evidence base that underpins the quality of urban resilience programing, investment, and project appraisal approaches.

The UCCRTF has the ambition to reduce the costs of climate change by 15%.

Overall, the UCCRTF project has the ambition to reduce the costs of climate change by 15% in those urban communities where it makes investments. There are, however, several practical challenges in monitoring and/or measuring the benefits of resilience:

  1. The evidence base for the historic economic costs of climate shocks and stresses in UCCRTF cities is limited, particularly at the catchment level of individual infrastructure investments;

  2. The resilience benefits of UCCRTF investments are likely to arise after the program has been completed and will accrue over infrastructure lifetime (potentially up to 50 years or more);

  3. The scale and/or frequency of climate shocks in a given city is unpredictable and will likely change over time, reflecting the trajectory of global warming (which is itself uncertain);

  4. UCCRTF cities are undergoing rapid socioeconomic change in terms of urbanization, population and infrastructure growth, thereby increasing the economic value of exposure over time;

  5. Not all economic impacts can be easily captured by market values (e.g. loss of life, eco-system impacts), requiring more nuanced approaches to valuation.

Modeling economic benefits of resilience

For this reason, UCCRTF is adopting a modeling approach to estimate the economic benefits of resilience. As part of the model, UCCRTF is ‘ground-truthing’ its assumptions – undertaking primary research around the UCCRTF portfolio of investments – as well as drawing upon secondary evidence from the UCCRTF cities and similar urban contexts. The following are important areas of socioeconomic research that are being undertaken as part of the UCCRTF program:

  • Building a profile of climate risks in UCCRTF cities (and similar urban contexts) and exploring how return periods for such events might evolve over time given future climate change;
  • Identifying economic costs associated with identified climate shocks through a combination of desk research and engagement with key, city-level stakeholders and communities;

  • Looking at the likely socioeconomic development pathways of UCCRTF cities in terms of changes in population and asset exposure;

  • Reviewing the evidence base for avoided damages associated with typical UCCRTF-type infrastructure investments and planning interventions;

  • Identifying emerging climate shocks and stresses during UCCRTF implementation to support real-time assessment of damage costs and the potential for avoided impacts.

Using this data, we are modeling a range of scenarios that will allow the UCCRTF program to identify the potential scope and scale of resilience benefits over time that are associated with its investment portfolio and capacity building activities.

These insights will be applied to explore ways of integrating the economic costs and benefits of resilience into the more mainstream appraisal of infrastructure projects. They will also help broaden understanding of the potential of resilience to underpin wider economic development in the urban context.

This article as originally published on Livable Cities – Asian Development Bank and is shared with kind permission.

Matthew Savage is a leading international expert on climate change economics policy and finance. He is currently working with the UCCRTF on measuring economic loss of shocks and stresses in cities. A visiting lecturer at the Universities of Oxford and Copenhagen, Matthew has worked in more than 30 countries across 5 continents, including roles at the United Kingdom’s Department for International Development (DFID) and the International Finance Corporation.

Cover photo by Livable Cities – Asian Development Bank.
What does the IPCC special report mean for the banking sector?

What does the IPCC special report mean for the banking sector?

By Laura Canevari

Earlier this month, the Intergovernmental Panel on Climate Change (IPCC) published a special report on global warming of 1.5°C above pre-industrial levels to examine the necessary greenhouse gas emission pathways to stay below that warming target while also comparing the likely climate change impacts of 1.5°C as opposed to 2°C warming. But what do the findings of this landmark report mean for the banking sector and why is it important for banks to consider them?

Changing the way banks invest

The special report offers compelling evidence to suggest global warming must be limited to 1.5°C (scroll down to read the report’s key messages). This will require a marked shift in investment and lending patterns, including doubling investments in low carbon and energy efficient technologies, and reducing investments in fossil fuels by at least a quarter over the next 20 years.

The total incremental investment for a 2°C-consistent pathway (including transportation and infrastructure) is estimated to be 2.5% of global Gross Fixed Capital Formation. Although there is no comprehensive estimate of investment needs to limit global warming to 1.5°C, the special report anticipates lower investment needs in adaptation under 1.5°C of global warming.

Banks will not only need to consider how to change the allocation of investments and loans in order to fuel a low carbon economy and to compensate for reductions in financial flows currently stemming from the value of fossil fuel assets. They will also have to consider how an increase in global warming from the current baseline (1°C above pre-industrial levels) to a 1.5°C, 2°C or an even warmer world would generate physical risks stemming from climate change impacts that may affect their portfolios.

Under a warmer climate, climate change poses a number of credit risks, for example:

  • More intense hot extremes in all land regions, as well as longer warm spells, can decrease agricultural productivity in multiple parts of the world, increasing default rates for agricultural loans.
  • An increase in sea level of between 0.26 to 0.77 m by 2100 in a 1.5°C warming scenario alone, could significantly increase the risk of coastal erosion and coastal flooding, affecting property values in coastal areas. This in turn can translate to changes in loan-to-value ratios and affect mortgage loan portfolios.
  • An increase in the number and intensity of extreme weather events can augment damages and losses to property and assets (potentially increasing costs from insurance premiums to clients) and can generate supply chain disruptions. This in turn can reduce revenue flows for borrowers across a number of productive sectors, according to the level of climate sensitivity of their assets and their exposure to extreme weather events, as well as to companies’ strategies to manage supply chain disruptions.
  • A significant decline of coral reefs of 70-90 percent under a 1.5°C global warming scenario could significantly affect the performance of assets and investments of tourist operators reliant on these ecosystems, as well as increase exposure of coastal properties to further erosion and flooding.

Managing market risks

Additionally, banks are faced with a number of market risks. For example, increasing frequency of severe weather events can affect macroeconomic conditions such as economic growth, employment and inflation. It can also generate changes in supply and demand for products and services as a result of high scale human migration.

Risks to global aggregated economic growth due to climate change impacts are projected to be lower at 1.5°C than at 2°C by the end of this century, excluding the costs of mitigation, adaptation investments and the benefits of adaptation. It is projected that countries in the tropics and in subtropical areas of the Southern Hemisphere will experience the largest impacts on economic growth.

Room for opportunities

But climate change also presents various investment opportunities for banks. For example, banks can take advantage of their customers’ needs to mitigate physical climate risks by offering loans to increase the resilience of their asset and infrastructure.

They can also tap into emerging markets for adaptation technologies and help companies increase their shares on adaptation investments, whilst shifting holdings away from carbon intensive industries.

Now is the time to act

It seems clear however that, under both a 1.5°C or a 2°C global warming scenario, the time for action is now. Banks should not wait for governments to strengthen their pledges in order to start evaluating the climate exposure of their portfolios. They should mitigate and take advantage of any emerging risks and investment opportunities now.

Aligning with the Taskforce for Climate Related Financial Disclosure (TCFD) recommendations, and mainstreaming climate change considerations in their governance, strategy, risk management and metrics & targets offers a very solid starting point. Some banks have already embarked on this journey: To learn how 16 of the world’s leading banks have started their response to the TCFD Recommendations, access our latest report “Navigating a New Climate” by clicking here.

To learn more about Acclimatise’s climate-related disclosure services, click here, and get in touch with our experts Laura Canevari & Robin Hamaker-Taylor.

Background on the IPCC special report: Global Warming of 1.5°C

Report’s key messages:

  • There is high confidence that human activities have already caused approximately 1.0°C of global warming above pre-industrial levels (±2°C likely range). The effects of this degree of warming are already felt globally, although they are unevenly distributed across geographies. In fact, nearly 20-40% of the world’s population already live in regions that have warmed by more than 1.5°C.
  • Every little bit of warming matters. Between 1960 and 1979 the world was roughly 0.5°C cooler than it was between 1990 and 2010s. This increase in global warming has already caused an increase in the frequency and duration of marine heatwaves, an increase in the intensity, frequency and/or amount of heavy precipitation events worldwide, and it has led to an increase in risk of drought in the Mediterranean region.
  • Peaking global warming at 1.5°C offers a much better future scenario than peaking at 2°C. Staying at or below 1.5°C would see at least 420 million fewer people being frequently exposed to extreme heatwaves and at least 10.4 million fewer people exposed to the impacts of sea level rise. It would also make it markedly easier trying to achieve the sustainable development goals.
  • However, at the current rate of warming, the world is very likely to reach 1.5°C warming by the mid 2040s.

Is it possible to stay under 1.5°C warming?

  • To stabilise emissions below 1.5°C, CO2 emissions must fall by about 45% by 2030 (from 2010 levels) and would need to reach “net zero” emissions by 2050. This would require changes at an unprecedented scale: deep emission cuts in all sectors, rapid assimilation of new technologies, behavioral change, and rapid increased investment in low carbon economies.
  • However, under the Nationally Determined Contributions (NDCs) pledged by countries in the Paris Agreement, global warming will surpass 1.5°C above pre-industrial levels. To limit warming to 1.5°C this threshold would have to first be exceeded for a maximum duration of a few decades, and then efforts would focus on to returning below 1.5°C before 2100 (the “overshoot” scenario). The longer the period of overshoot, the greater the reliance on CO2 removal techniques (with uncertain levels of success).
Cover photo by U.S. Navy Chief Mass Communication Specialist Ryan J. Courtade/Released: Breezy Point, N.Y., Nov. 14, 2012 — In the wake of Hurricane Sandy debris and destruction can be seen in and around the houses in Breezy Point, N.Y. Over 100 houses burned to the ground as flood waters isolated the community from fireman.
How do you make the financial business case for the private sector to invest in resilience?

How do you make the financial business case for the private sector to invest in resilience?

By Climate Finance Advisors

Last week’s Climate Week NYC played host to 35 official events on private investment for climate change and countless satellite gatherings, from the Sustainable Investment Forum to Climate Infrastructure. The topic has gained currency as municipal governments grapple with deferred maintenance of infrastructure, public pension liabilities, and other expenditures, ten years after the Great Recession local budgets remain tight. Add to this mix a growing and urgent need for climate-proofing local infrastructure, and it’s not hard to see why government officials and policymakers are searching for solutions that share the costs of climate-resilient infrastructure investment with the private sector.

On September 12, the Houston Advanced Research Center (HARC) hosted a panel on resilience financing that focused on how the public and private sectors together could develop resilience funding mechanisms for Houston. Stacy Swann, the CEO and Founding Partner of Climate Finance Advisors, joined by other five national thought leaders from the financial sector, shared insights on resilience bonds and how they may provide the necessary financing to future local infrastructure projects.

One year after Hurricane Harvey, Houston is clearly in need of climate-resilient infrastructure to prepare for future damaging flood events. This second costliest storm on record caused $125 billion worth of damage and put one-third of the city underwater. The estimated loss due to business interruption is $26 billion, and around 500 businesses are reported to have major damage. During the disaster, Harris County Flood Control District infrastructure sustained significant damage and will require an estimated $155 million for assessment and repairs. Within a network of 2,500 miles of bayous, creeks, and drainage systems, 1,200 sites were reported to damage such as erosion, slope failures, silt deposit, and concrete failures. However, as pointed out during the panel, the potential capital expenditure for infrastructure repair and development exceeds the public funding available.

The question on everyone’s mind is: How to catalyze private capital as a complement to public funding sources? With consensus on the importance of resiliency continuing to build, the need for capital and emerging partnerships between governments, industries, and communities may offer opportunities for innovative financing mechanisms.

Besides public infrastructure, many industries are vulnerable to such extreme weather events too, suggesting they have a business incentive to be proactive on climate resilience. As hurricanes rage, industries from fossil fuels to agriculture to Internet infrastructure are grappling with the impacts of climate change on infrastructure and other real assets. But are they ready to open their pocketbooks and invest in public and private infrastructure that delivers resilience solutions?

Let’s examine some of the affected industries. Representing 40% of the nation’s petrochemical manufacturing capacity, refineries, chemicals and plastic manufacturers along the Gulf Coast suffered substantial losses and posed threats to the environment. At the peak of the Hurricane Harvey flooding, more than 25% of the U.S. refining capacity was shut down, equivalent to the processing capacity of 4.8 million barrels per day. Domestic gasoline retail prices jumped more than 10% due to supply disruptions and refinery outages. Besides economic impacts, ExxonMobil, Shell, Valero, and Kinder Morgan were reported to experience storage tank failures, leading to leaks and spills of more than 620,000 pounds of hazardous chemicals including crude oil, benzene, and volatile organic compounds.  Leak incidents from natural gas and anhydrous hydrogen chloride pipelines were also reported, according to the National Response Center. While these immediate problems will be addressed, and manufacturing facilities will return to normal production eventually, the environmental damage as well as corporate costs and lost revenues underscore these industries’ vulnerability to extreme weather events.

It’s increasingly clear that Harvey is hardly a unique event. On the East Coast earlier this month, Hurricane Florence brought rainfall of more than 30 inches to Wilmington and other parts of eastern North Carolina. Besides road closures and power outages, the hurricane also caused a coal-ash breach in a landfill owned by Duke Energy, leaking 2,000 cubic yards of material containing mercury, arsenic and other toxic substances. While the exact impacts of the breach are yet unknown, this incident, following similar coal ash pond discharge events in 2014 and 2016, clearly illustrated how vulnerable fossil fuel infrastructure can be, particularly during extreme weather events.

Buffeted by Florence’s winds and catastrophic flooding, agriculture took a hit as well. As one of the nation’s largest poultry- and hog-producing states, North Carolina lost 3.4 million poultry and 5,500 hogs, according to preliminary estimates, and there have been widespread reports of manure lagoons flooding, leading to untold environmental damage from toxic contamination. Tobacco and sweet potato crops were affected as well. Before Florence made landfall, only half of tobacco and a quarter of the sweet potato crop were harvested. North Carolina accounts for 50% of the U.S. tobacco production and is the largest producer of sweet potatoes.

And the impacts of substantial physical climate risks are not limited to the fossil fuel, petrochemical, and agriculture industries. In as soon as 15 years, a significant part of U.S. Internet infrastructure will be underwater due to sea level rise, including over 4,000 miles of fiber conduit and 1,000 nodes, according to a recent study by researchers at the University of Oregon and University of Wisconsin-Madison. Among all service providers, CenturyLink, Intelliquent, and AT&T are identified at the highest risk with a significant amount of infrastructure located in coastal regions.

These imminent and material risks call for immediate action from a wide range of corporate actors. However, a report published earlier this year by CDP and Climate Disclosure Standards Board (CDSB) suggests that most companies are not yet ready to take strategic actions to address climate-related risks. This study looked at more than 1,600 companies across 14 countries and 11 sectors. While 82% of the surveyed companies acknowledged the risks and opportunities associated with climate change, only 12% of them address these issues by providing incentives to the board. Furthermore, a second survey released by HSBC during this year’s Global Climate Action Summit (GCAS) suggests that less than 10% of 1,731 issuers and investors are aware of the Taskforce on Climate-related Financial Disclosures (TCFD), which last year released guidelines on corporate climate-related risk disclosure.

Businesses vulnerable to changes in climate and weather need to make long-term and strategic investments that are climate-resilient, which will not only help mitigate potential risks, but may also transform business threats into opportunities, and develop core competencies by committing to climate-smart investment. While the TCFD’s recommendations for corporations on disclosure are an important first step, fully integrating climate change considerations in corporate strategy and risk management is a much more comprehensive and holistic process.

This year, as a first step, Climate Finance Advisors, in collaboration with Acclimatise and Four Twenty Seven, published a Lenders’ Guide for Considering Climate Risk in Infrastructure Investments to address questions shared by banking institutions and infrastructure investors. This report provides a framework to help investors understand climate-related physical risks, such as from weather damage and natural disasters, by linking them to projects’ revenue, cost, and asset value. This and other climate risk identification and management tools are helping to bring climate risk considerations into C-suites and investment committees, the first step in climate-proofing business models and investment portfolios, and mobilizing capital for public and private resilience solutions. In future blog posts, we will explore the business case for private investment in resilience that can help mobilize much-needed capital – stay tuned.

This article was originally published on Climate Finance Advisors and is shared with kind permission.

Cover photo by US Navy: In the wake of Hurricane Sandy debris and destruction can be seen in and around the houses in Breezy Point, N.Y. Over 100 houses burned to the ground as flood waters isolated the community from fireman. Hurricane Sandy was the largest Atlantic hurricane on record and caused the most damage in New York and New Jersey Oct. 29, 2012. (U.S. Navy photo by Chief Mass Communication Specialist Ryan J. Courtade/Released) Photo by Ryan Courtade – Nov 13, 2012 – Location: Breezy Point, NY. The appearance of U.S. Department of Defense (DoD) visual information does not imply or constitute DoD endorsement.
EBRD launches physical climate risk tool at California conference

EBRD launches physical climate risk tool at California conference

By Franka Klingel, EBRD

The impacts of climate change have dominated headlines this year. This summer has seen some of the most severe wildfires in California, with an area of 5,808.30 km2 devastated and the total losses estimated at US$ 2.5 billion. Europe has also experienced its fair share of extreme weather events – the cost of Greece’s deadly Attica fires in July is estimated to be around US$ 33.7 million while Storm Friederike earlier this year caused an overall loss of US$ 2.7 billion to Germany and its surrounding neighbours.

It is therefore very timely that Bank of America and the European Bank for Reconstruction and Development (EBRD) hosted the event “Finance, Business and Climate Resilience: Physical Climate Risks and Opportunities in San Francisco as part of the California Global Climate Action Summit.

The event focused on how financial institutions and businesses can share better market information to help factor physical climate risks into their operations, investment decisions, and financial and corporate reporting.

It provided an opportunity for the EBRD to share insights about how it has integrated physical climate risk management and climate resilience into its financing operations, as part of its Green Economy Transition (GET) approach.

During this high-profile event, the EBRD also released a new knowledge product – a web tool exploring how businesses can integrate information about physical climate change impacts into corporate and financial reporting.

Access EBRD’s physical climate risk knowledge hub by clicking here.

Covering firms across a range of sectors including manufacturing, agribusiness, power and energy, mining and commercial property, the infographic provides successful examples of how recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) on physical climate can be put into practice. It builds on the report Advancing TCFD Guidance on physical Climate Risks and Opportunities , which was jointly developed by the EBRD, the Global Centre on Adaptation (GCA), a range of partners from the financial, corporate and regulatory sector as well as two consultancy firms,  Acclimatise and Four Twenty Seven. This report, which was published in May 2018, provided recommendations on how institutions can include physical climate risks and opportunities into their financial and corporate reporting.

In addition, the United Nations Environment Programme Finance Initiative presented their newly developed methodology on assessing the risks and opportunities from the physical impacts of climate change on financial institutions’ loan portfolios. They also shared experience of piloting the methodology in 17 partner financial institutions.

The “Finance, Business and Climate Resilience: Physical Climate Risks and Opportunities” event was a milestone along a collaborative journey that involves thought leaders from the corporate, finance and regulatory sectors, which the EBRD and the GCECA initiated in 2017 based on the recommendations of the TCFD.

Whilst the TCFD recommendations provided a framework for disclosing transition and physical climate risks and opportunities, they left organisations to develop their own methodologies and approaches for implementing the disclosure recommendations.

A vivid public discussion followed, focusing on the impacts of transition risks. However, physical climate impacts also affect businesses’ balance sheets and asset values.

Here at the EBRD we have been developing practical approaches to supporting climate resilience through our investment operations for almost a decade. This experience enables us to support our clients in identifying the specific hazards they face from the physical impacts of climate change.

Since 2011, we have built up a portfolio of over 200 climate resilience investments with a total investment volume of more than €5 billion. Covering a wide range of sectors and industries, this provides a valuable evidence base and demonstration impact for the growing range of businesses and financial institutions interested in managing physical climate risks and promoting climate resilience through their investments and operations.

This blog was originally published on EBRD’s website and is shared with kind permission.

Who benefits and who’s willing to pay? Key questions for adaptation finance

Who benefits and who’s willing to pay? Key questions for adaptation finance

By Mairi Dupar, Technical Advisor to CDKN

Last week in London, Climate Policy Initiative, adelphi and GIZ convened a roundtable to examine developing countries’ financing challenges, needs and opportunities in response to climate risk. The discussion ranged from government preparedness to the insurance industry’s role in encouraging resilient behaviours by adjusting premiums. Mairi Dupar of CDKN shares her view.*

The adaptation finance roundtable focused on how developing countries can mobilise investment for climate adaptation more effectively. The discussions explored a key question: ‘Who benefits from investments to reduce climate risk and, as a result, who is willing to pay?

Indeed, ‘who benefits’ is a question that gets to the heart of individual and organisational incentives to invest in climate change adaptation.

Consider a mangrove forest

Convincing businesses to pay for climate adaptation depends on aligning identified risks (and mitigating measures) with their business plans.

The group considered the hypothetical case of a 5 star hotel on a stretch of coastline, where mangroves protect against coastal erosion. Imagine how important the mangroves’ ‘green infrastructure’ could be in breaking up wave energy and retaining soils as storm surges increasingly pound the coast in a changing climate. The hotel’s very existence depends on the shoreline’s integrity and the presence of mangroves.

The hotel company would benefit directly and materially from preserving the mangroves. There is a clear business case for why the company should invest in mangrove conservation to protect its own continuity. Here, investing in mangrove protection, a form of climate risk reduction, becomes an integral part of the business plan.

In this scenario, it is likely that conserving the mangroves would benefit the local community and wider society, by providing many ecosystem services (some with direct monetary value, others not), such as hatching grounds for fish, carbon storage and sequestration, and so on. These would be ‘positive externalities’ of the company’s investment, that would bolster broader social resilience.

Consider another case: the 5 star hotel is positioned several kilometres inland. Removing the mangroves has no immediate impact on the hotel’s physical integrity and its profitability over five, ten, even twenty years. Imagine in this scenario that thousands of low income residents are situated close to the mangrove forest and highly exposed to coastal storm surges if the mangroves are cut. Some community members gain from cutting the mangroves today for their firewood and income needs, but overall, these gains are small and short-lived; whereas a mangrove conservation scheme promises steadier long term employment for some workers and indirect benefit from healthy fisheries and a resilient, more protective coastal environment, for thousands more people.

In this scenario, the hotel company doesn’t have a business case for investing in the mangrove’s protection; it has less stake in the game.

By contrast, thousands of community members have a material, long-term stake in the mangroves’ health. Here, the needed investment in mangrove conservation (and hence climate risk reduction) is a public good. Who invests? Who is willing to pay?

The hotel company may be willing to pay, but as a matter of corporate social responsibility or ‘charitable work’ rather than as an integral part of its business operation.

The community members may band together to self-organise and pay in cash or in kind for mangrove conservation. Or, this could be a role for financing by local or national government (or benevolent, external actors) of this public good.

Business basics are what drive private sector adaptation investments

“We need to be careful about over-emphasising the call for ‘innovative’ financial mechanisms to attract private investment to climate adaptation,” said John Firth, Director of Acclimatise. “What we need to do to mobilise private sector investment is in fact quite simple. We need to answer two questions: ‘Is there a business case, for investment in climate change adaptation and for more resilient investments,’ and ‘is there a return on investment?’”

Sometimes the investments that companies need to make to reduce their climate exposure and vulnerability are clear-cut.

Other times, it takes big picture thinking and good data and analysis to pinpoint the investments that will reduce climate risks to a manageable level. The Oasis Platform for Catastrophe and Climate Change Risk Assessment and Adaptation – which is funded by the CPI’s Global Innovation Lab for Climate Finance, offers ‘a set of tools that together aim to offer a more transparent, robust and comprehensive approach for analysing and pricing risk from extreme events’ including modelling of climate-related disaster losses.

Dickie Whitaker, its Chief Executive, said: “We are looking at mangrove swamp removal and coral reefs and the connection is embedded in the model-as well as factors such as the type of soil, the saturation of soil, and the runoff. We don’t say ‘I wonder what will happen to the mangrove swamps because it’s included in the model already – if someone takes the mangroves away, then the insurability will go down”.

Financing adaptation when it’s a public good

Craig Davies of the EBRD pointed out that recent developments such as the Task Force on Climate-related Financial Disclosures (TCFD) are beginning to create incentives for a more rational allocation of capital in a way that reflects the realities of climate change impacts. Multilateral finance institutions and climate finance mechanisms should urgently consider how the public funds that they manage can help ensure that developing countries are not left behind. ‘International climate finance has an important counter-cyclical role in supporting vulnerable locations and communities that commercial finance would otherwise not reach’ said Dr Davies.

Forms of blended finance, where the public sector takes the ‘first loss’ for an adaptation investment and reduces financial risk for private investors, are growing in popularity – a recent article by Charlotte Ellis and Kamleshan Pillay documents promising blended finance initiatives in Southern Africa.

Ultimately – according to John Ward, Director of Pengwern Associates, the public sector may have a role to play in monetising and paying for the benefits of resilience activities that are not currently monetised and paid for.

These interventions to build climate resilient societies – beyond the company level – could be as fundamental and diverse as: data and information sharing, creating education and alert systems, creating, preserving or restoring public infrastructure and many other activities.

Once these public goods activities are identified, then either they can be funded by public monies or, said Mr Ward, “you identify who the people are who are willing to pay to access those benefits and match them to the investors who are willing to bear the costs.”

Roundtable participants agreed that non-governmental organisations have often led the field in identifying the multiple benefits of adaptation projects and either financing them directly from their own private sources, or setting up reciprocal financing mechanisms to make programmes self-sustaining. Many successful NGO initiatives involve nature-based solutions that mediate the impacts of climate change—such as tree-planting and sustainable water management in watersheds to benefit both upstream and downstream water users and compensate natural resource managers for their efforts. One such combined initiative on climate adaptation and mitigation, by the NGO Natura Bolivia in Santa Cruz Department of Bolivia, has now grown exponentially in size and is being adopted across many other parts of Bolivia and South America.

Inaction is not an option

One thing is for certain: experts at the roundtable agreed that identifying climate risks, who has a stake in managing the risks and who’s willing to pay – plus the job of unlocking that finance – is a process that generally takes too long. Climate risks are here today and action is needed now. Without action to reduce climate-related risks, losses for firms and for societies will mount – with UNEP predicting an annual cost of climate adaptation in developing countries of up to US$500 billion per annum by 2050.

The roundtable was part of an ongoing study and consultative process by CPI and adelphi, on the challenges and opportunities for adaptation finance. The results are due to be presented in late 2018. Top of the study team’s initial conclusions – according to CPI analyst Valerio Micale – are the need tocreate demand among governments and private companies for services and products to analyse climate risks.’

*The policy roundtable took place under Chatham House rules and all interviewees agreed to be quoted for this article.

Further results of the study will be published on This article was originally by published on CDKN’s website and is shared with the author’s permission.

Cover photo by Anton Bielousov/Wikimedia Commons (CC BY-SA 3.0): Mangroves in Los Haitises National Park (Dominican Republic).