October 3, 2018
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.