Stakes are high for communities that have already started experiencing extreme rain, storm events, or wildfires. In the past three years, climate damage has cost the world $650 billion, two-thirds of which was covered by North America alone, and if trends continue, the damage could reach hundreds of billions of dollars just in the United States by 2090.
But how well prepared are these communities for the age of adaptation? Frontline communities are acutely aware of the numerous ways climate change can impact local economies, jobs, and livelihoods, including in terms of business interruption, loss of income and economic activity, and costs of rebuilding. Further, those that are starting to face frequent rebuilding efforts due to events linked to climate change are beginning to expand their time horizons beyond simply building back.
Earlier this week, Stacy Swann, CFA’s CEO, spoke at the Pew Charitable Trusts and Regional Plan Association (RPA) event “Flood Risk Impact to the Financial Health of Communities” that explored specific actions that makes a community climate-resilient in the face of increased flooding, and, importantly, how to finance the road to get there.
This issue becomes most pressing for community policymakers where financial health and resilience to climate change are interconnected and mutually reinforcing. These policymakers – be they mayors, city or regional planners, or local city councils – are on the frontline when climate events – such as severe flooding – impact local economic activity, jobs and livelihoods. They are also at the forefront of local infrastructure planning and play an important role in the development of plans that can empower adaptation and resilience to reduce those impacts in the future.
Executing those plans and getting resilient infrastructure in place often requires financing approaches that deploy public capital in ways that can most effectively “crowd-in” private capital. Often called “blended finance”, these approaches are not necessarily novel. In fact, using public incentives to catalyze investments in the interests of the public good has been employed for decades, including for goals as simple as creating economic development or jump-starting new industries. Examples of such approaches used to accelerate climate-related investments include green investment banks, tax credits for solar and wind development, and rebate programs for electric vehicle purchases.
Financing climate-related community infrastructure in the age of adaptation is deserving of a range of “blended finance” options and is an important tool for policymakers to consider in their financing strategies. Pew and the RPA’s recently released report Mitigation Matters: Policy Solutions to Reduce Local Flood Risk reviews existing actions that policymakers around the United States are undertaking to help maximize the effectiveness of existing public funds to catalyze investment in adaptation and resilience, and includes examples from places like Indiana and Maryland, where revolving loan funds help residents and communities pay for flood mitigation infrastructure, and Arkansas which provides tax credits for property owners that restore or create wetlands to absorb floodwaters.
What is true practically everywhere is that public funding alone is not sufficient to fully finance the resilient infrastructure needed in a 2°C world, and private capital can play an important role if policies, incentives, interests, and objectives are clear and aligned. Negotiating the alignment of interests between public and private capital is often tricky work, but regardless of which balance sheet you are investing with, it is in everyone’s interests to value climate-resilience. Climate Finance Advisors and Four Twenty Seven explored these issues in our joint article Addressing Climate Risk in Financial Decision Making published this fall in Optimizing Community Infrastructure: Resilience in the Face of Shocks and Stresses. In this piece, we assert that integrating climate risks into the ways investors assess investments can have the effect of incentivizing resilience, or at least in theory allowing those projects which have incorporated resilience measures to be perceived as less risky, and thus be more attractive. To do this, investors must recognize that the past is not a predictor of the future (given the current warming trajectory), and key data, analytics, and other scenario analyses on potential value at risk from climate change will be critical.
In addition, CFA and Four Twenty Seven argue that investors may do well to seek investments that contribute to a “systems approach”, Understanding an infrastructure asset’s place within broader community systems, such as transport and transmission reliability during storms, or community planning that, by design, retreats from coastal proximity to minimize losses when extreme climate events happen.
While sometimes an Achilles heel, the U.S.’s decentralized structure can allow for state and local governments to undertake a systems approach to planning for climate resilience, and it is starting to show. In Iowa, the Department of Transportation and Iowa State University used rainfall data to forecast discharge rates from local basins that had severely flooded. Then, the team compared estimates of future flooding with official asset records to incorporate climate-resilient designs for at-risk roads, bridges, and other infrastructure. The City of St. Paul, Minnesota replaced a crumbling shopping mall with urban wetlands to serve as natural holding tanks for rainwater and prevent sewer overflow. In addition to reducing flood risk, the inclusion of green infrastructure into the urban landscape has also provided a natural carbon sink and increased local biodiversity.
For both public and private investors, smart investments can deliver a ‘triple dividend’ by preventing losses, sparking economic growth and innovation, and alleviating social and environmental challenges, particularly among the most vulnerable. Approaches bundling these “co-benefits” are starting to appear in some sustainable infrastructure investments. For example, the San Diego airport was designed with a focus on water conservation and climate resilience features like high-altitude siting to account for rising sea levels and closed-loop water systems to adapt to increasing water scarcity. These preventative measures may have contributed to the airport maintaining favorable credit ratings from Moody’s and S&P, key barometers of overall risk for investors. Prescient public policymakers who incorporate resilience and adaptation into their infrastructure planning may well become less “risky” partners for private investors seeking these triple dividends or simply good solid (and resilient) returns on investment.
While these efforts at all levels are steps in the right direction, more aggressive action is needed everywhere, at all levels of government, and with all types of investors. The World Economic Forum estimates a global infrastructure financing gap of $18 trillion by 2040, meaning worldwide infrastructure investment would need to increase by 23% per year. If governments and private investors fail to build climate resilience into communities and their infrastructure projects, climate risks will make closing the gap more difficult to achieve.