Let’s review a few of the more striking facts about our climate to emerge in the last week:
- In 2015, the planet was the warmest ever recorded. By a long shot.
- Global sea levels are at their highest since satellites began recording those levels in 1993, up an alarming 2.75 inches.
- While many parts of the world saw above-normal rainy seasons, which led to major floods, the amount of land surface globally experiencing severe drought increased from 8% in 2014 to 14% in 2015, indicating extremes in the Earth’s water and precipitation cycles.
- In the first six months of 2016, the U.S. had already experienced eight “billion-dollar” disaster events, many exacerbated by climate change.
- Just a week ago, Ellicott City, Maryland, experienced what the National Weather Service called a “1-in-1,000-year event”. There have been three of these 1-in-1,000-year events in the U.S. this year, including one in Houston and one in West Virginia.
These are facts, not speculation, and they contribute to an alarming amount of evidence that the climate is changing. It is clear that climate change is not just a problem for future generations; it is something that we all need to address now.
At the White House Forum on Climate Smart Finance for Resilience, the conversation last week was squarely about how to address the increasing challenges posed by climate change, and, importantly, how to finance the investments necessary to build resilience to rising temperatures, rising seas, stronger storms and longer, more intense heatwaves. The event brought together a number of representatives from insurance, development finance, mortgage finance and banks, as well as those working on the front lines of disaster mitigation in many parts of the United States including communities across the country that are addressing drought, floods, extreme storms and wildfire risks. The purpose of the meeting was to explore innovative approaches to incentivize pre-disaster mitigation activities and to finance resilience.
With mounting disaster costs and an expectation that these costs will only increase in the absence of more-resilient infrastructure, it is clear that public funding alone will be insufficient to meet these costs. Many of the participants in the White House forum talked about innovative financing mechanisms, such as resilient mortgages, green bonds, insurance pricing that reflects greater resilience in buildings, and even approaches to using tax incentives to bring about resilient investments.
Ultimately, and without exception, all infrastructure financing should incorporate climate risks, and this “mainstreaming” will be key to unlocking significant amounts of financing for resilience across the board. However, mainstreaming is a process, and while there are a number of financial actors taking concrete steps to integrate climate considerations throughout operations, for the most part these efforts are only just beginning, and few in the financial sector actually incorporate climate risks or resilience into investment decisions. Climate risks are unique in that future risks are directly tied to present decisions,. Many in the broader financial industry cite two important requirements for accelerating the mainstreaming of climate into finance: (i) having reliable, comparable data and analytics that can help quantify climate risks of all types for many types of financial users, and (ii) having appropriate pricing of risks in the market (including a price on carbon). These two requirements can be mutually reinforcing, and as this type of mainstreaming gathers momentum, they are likely to help accelerate and scale the amount of financing that is “climate-smart.” Indeed, a number of complementary policy efforts are underway, including the work by the Task Force for Climate Related Financial Disclosures, which if successful will enable a greater level of information and transparency around climate risks for investors and the financial system as a whole.
These efforts all indicate that the financial system is getting climate-smart. But it’s not fast enough. It might be time to consider blending finance for resilience.
Blending in Action
Blended Finance is – by definition – useful in circumstances where we need to accelerate investments that aren’t happening today but that absolutely need to happen to address a market failure that is based on misunderstanding of risk or a lack of quality and transparent information flows. In the past, blended finance approaches have been used to accelerate investments in clean energy, energy access, rural agriculture and other segments that mainstream investors felt were too risky due to high “perceived risk” and mispricing (or unavailability) of financing.
A number of good blended finance models have emerged over the last 10 years. Just about every Multilateral Development Bank has a blended finance approach, and most have collected a body of experience on what works, what doesn’t, and what principles are important. These blended finance approaches have been crucial to accelerating investments beyond the MDBs’ normal business, for example by taking financing into new technologies or down market to smaller investee companies. For the most part, blended finance facilities operate on the basis of key principles, including that the money deployed fills a financing gap that the markets are not filling on their own.
In the U.S., many Green Banks are akin to international blended finance facilities in that they take public (and sometimes philanthropic) dollars and focus their efforts on accelerating investments that wouldn’t otherwise happen. They are often government-supported, public-private investment partnerships which blend and leverage public capital to increase and accelerate private investment, but unlike some of the MDB blended finance models, Green Banks are focused solely on the mission of accelerating clean energy investments, and they do so locally. Some of the more successful Green Banks, such as the Connecticut Green Bank, have also proven that a portfolio of well-structured clean energy projects can be bundled for institutional investors, providing them with access to projects they may not have previously had the appetite to invest in directly.
All Resilience Is Ultimately Local
Building our resilience to climate change will be a matter of scale and speed, and we need to consider all of our financing options. The question at last week’s Forum was about how to support innovative financing solutions at the local level, and in some cases how to “layer” various government-supported financing initiatives to achieve resilience goals. Whether “layering”, bundling or blending, the key to financing resilience will be to ensure that the funds address local resilience needs, as climate impacts are contextual and local, and solutions for one part of the country, or even one part of a state, may not be the same as another. Blended finance mechanisms – such as Green Banks, or those run by development finance institutions – have proven to be useful parts of the financial ecosystem for consolidating fragmented sources of public financing, focusing on achieving specific impacts more quickly than would otherwise happen, and ultimately channeling “fit-for-purpose” guarantees, debt and equity to meet the financing needs and take the risks that the markets were not willing to bear.
For the challenge of accelerating our resilience to climate change, the blended finance approach seems not only appropriate but necessary. Blended finance is not a silver bullet, and many financing approaches may be needed. But making our infrastructure, housing and communities more resilient is a good financial bet, and accelerating resilience in these investments is critical to addressing, adapting and ultimately managing our future climate risks.