Whether it is the catastrophic floods in Germany and Belgium, forest fires in southern Europe, the United States and Australia, the “heat dome” in North America or the water that trickling down the tunnels of the New York subway, there is no shortage of recent vivid images of the climate. extreme weather events linked to change in the world.
Physical climatic risks come in two forms:
- Chronic – the constant rise in temperatures will have more and more impact on the productivity the land and the people who depend on it for their livelihood; changes in rainfall patterns will result in water stress in more regions; and sea level rise will impact coastal real estate, industry and, more fundamentally, livability in low lying areas.
- Acute – it means that there is an increased probability of extreme heat; then there is extreme forest fires, droughts and storms – their frequency and intensity should change to varying degrees in a warming world.
Table 1: Physical climatic risks
|Temperature||Precipitation||The sea level rises||Wind||Water (flood / drought)||Fires||Extreme temperature|
How can the financial sector cope with these risks?
Develop the climate adaptation market
It is essential that the market for financing adaptation and resilience to climate change be broadened, especially since a certain amount of warming is already “buried” in the Earth’s atmosphere.
Despite current efforts to reduce emissions, there is a relatively high chance that we will temporarily exceed the preferred temperature threshold of 1.5 ° C of the Paris Agreement at some point in the next five years. While in the longer term we may be able to maintain warming at this level, climate impacts at 1.5 ° C will still be significant.
This means that investments in resilience and adaptation are needed.
Current funding flows for adaptation efforts can have well-documented benefits, with an estimated return of $ 7.1 trillion on a theoretical investment of $ 1.8 trillion globally over 10 years. However, they are still woefully insufficient – especially from the private sector.
The cost of climate adaptation is estimated at 300 billion USD per year in 2030, compared to 30 billion USD invested in 2017-2018. Only 1.6% of this amount comes from private sources.
Various innovative financial solutions could be used to finance climate adaptation. These include:
- catastrophe bonds
- environmental impact bonds
- resilience bonds (the most emerging).
These vehicles are needed because green and climate-aligned bonds are widely used today to finance climate change mitigation – only 3 to 5% of emissions have been linked to adaptation projects, and these have been largely in the water sector.
Now is the time to expand these approaches, although there are a few hurdles that need to be overcome first.
Obstacles to action
Despite the benefits of investing in resilience, access to capital can be an issue when other projects are prioritized due to shorter or better defined payback periods.
For example, investing to make buildings being more resistant to extreme events has advantages, including improved energy efficiency and access to alternative (often cleaner) energy sources.
However, the high upfront costs as well as the difficulty of calculating returns, which span over many years, may mean that other projects are favored over such improvements in resilience.
Another problem is that most Infrastructure at risk from climate change is publicly owned, with little incentive for business entities to support related improvements to benefit communities.
In addition to this, the public entities overseeing this infrastructure may be over-indebted or lack the technical capacity to effectively plan for climate change resilience, which may require complex analytical techniques. A fragmentation of approaches between different types of infrastructure from many parties can also hamper large-scale climate resilience investments.
Finally, it is difficult to carry out climate risk assessments and integrate climate concerns into traditional cost-benefit analyzes because of the uncertainties inherent in the impact of climate change.
In addition, as hazard and vulnerability assessments improve, the disclosure of relevant and detailed exposure and financial information for asset-level assessments is lacking.
What are the solutions ?
It goes without saying that improving the quality of climate information across the financial system is a necessity. As more and more institutions adhere to the principles of the Taskforce on Climate-related Financial Disclosures (TCFD), work is underway to develop guidance and standards around a common set of measures for reporting risks and physical climatic opportunities. It will take some time.
In addition, it is necessary Capacity Building, especially since there are so many actors involved in the development of climate-resilient infrastructure. This is the case even for a single building. It becomes much more complex at the community level.
Collaboration, liaison and learning, for example, at the city level can help develop a climate resilient financial system to support these communities. Mission-based ecosystems could be one approach to bring various actors together.
Finally, given the nature of infrastructure ownership and the need to attract more private investment to this space globally, but particularly in emerging markets, Public-private partnerships can play a key role.
High-income countries have pledged $ 100 billion a year in climate finance by 2020 to help developing countries adapt to the consequences of climate change. To increase private commitments based on this public money, blended finance could play a big role.
The combination of these approaches, with innovative financing techniques, can allow an adequate level of investment to limit the future scale of climate change and limit its impacts.
Due to the level of climate change already guaranteed by current and projected short-term emissions, delaying investments in climate adaptation is no longer an option.
All opinions expressed herein are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may have different opinions and make different investment decisions for different clients. The opinions expressed in this podcast do not in any way constitute investment advice.
The value of investments and the income from them may go down as well as up and investors may not get back their initial investment. Past performance is no guarantee of future returns.
Investment in emerging markets, or in specialized or small sectors is likely to be subject to above-average volatility due to a high degree of concentration, greater uncertainty because less information is available. available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of developed international markets. For this reason, portfolio transaction, liquidation and custody services on behalf of funds invested in emerging markets may involve higher risk.