This joint report provides a comprehensive analysis of the ways in which climate risks affect sovereign risk, demonstrating new empirical evidence of how climate risk and resilience influence the costs of capital. It also explores the implications for Southeast Asia in particular, where countries are highly exposed to climate change risks and their economic consequences. Lastly, the report outlines five policy recommendations based on these findings. The report was a collaboration between the Centre for Sustainable Finance at SOAS University of London, the Asian Development Bank Institute, the World Wide Fund for Nature Singapore and Four Twenty Seven.
“Climate Change and Sovereign Risk” outlines six transmission channels through which climate change affects sovereign risk and in turn the cost of capital, providing examples of each and explaining how they’re connected. It uses empirical analysis to demonstrate the significant impacts of climate risk exposure on the cost of capital. Using a sample of 40 developed and emerging economies, econometric analysis shows that higher climate risk vulnerability leads to significant rises in the cost of sovereign borrowing. Premia on sovereign bond yields amount to around 275 basis points for economies highly exposed to climate risk. This risk premium is estimated at 113 basis points for emerging market economies overall, and 155 basis points for Southeast Asian economies.
To further explore these channels, the report provides a closer look at Southeast Asia, a region with significant exposure to climate hazards such as storms, floods, sea level rise, heat waves and water stress. Physical risks are expected to considerably affect economic activity, international commerce, employment and public finances across Southeast Asian countries. Transition risks will be prominent as exports and economies become affected by international climate policies, technological change and shifting consumption patterns. The implications of climate change for macrofinancial stability and sovereign risk are likely to be material for most if not all countries in Southeast Asia.
The report highlights the need for governments to climate-proof their economies and public finances or potentially face an ever-worsening spiral of climate vulnerability and unsustainable debt burdens. It outlines five policy recommendations, emphasizing the importance for financial authorities to integrate climate risk into their risk management processes and for governments to prioritize comprehensive climate vulnerability assessments and work with the financial sector to promote investment in climate adaptation.
The analysis highlights several areas with particular exposure to increasing sea level rise, which threatens property value growth and associate tax revenue, in turn increasing credit risk. Increased disruption due to coastal flooding disrupts the local economies that rely on coastal economic activities to generate revenue. Likewise, areas less exposed to flooding are prone to climate gentrification, as property values increase when these areas become more desirable and residents can be displaced. Though it can be expensive, effective, equitable adaptation measures can reduce vulnerability to sea level rise and support credit-quality. This requires tax revenue, financial capacity, and growth strategies that aim to protect vulnerable local economies and property values.
Coastal economies across the U.S. are exposed to the impacts of sea level rise. However coordinated adaptation efforts between federal, state and local governments can reduce risks. Areas such as Gulf Coast states lag in state-level adaptation policies, causing local governments to shoulder the financial burden of sea level rise, and straining their credit quality. Federal government leadership and increased funding is key in supporting adaptation measures that mitigate the impacts of sea level risks in coastal areas.
The planet has just finished its hottest decade on record, leaving municipalities and businesses wondering how best to prepare for the future. As climate change increases the frequency and intensity of both extreme weather events like storms and heat waves, and chronic stresses like drought and sea level rise, the past is no longer an accurate prediction of the present.
While Canada’s latitude and geography makes it less exposed to widespread threats such as heat stress and hurricanes, its exposure to water stress and floods, alongside its economic dependency on water-heavy industries such as extraction, refining and manufacturing, does present significant risks. From striving to keep their residents safe, to supporting regional businesses, maintaining economic prosperity and minimizing costs, there are many reasons that municipal leaders need to understand and prepare for climate impacts.
This article outlines how climate risk presents economic risks to municipalities, as well as the investors with assets in the jurisdictions, and describes case studies of economic risk exposure in Canadian cities.
Why it Matters
Climate change poses economic risks to municipalities by impacting key companies, reducing the tax base, and affecting the budget. When companies that make up significant portions of a municipality’s economy — by way of revenue, taxes and employment —are disrupted by climate change, this has negative implications for the municipality. If these events happen repeatedly, it’s likely that jobs and, potentially the population, will decline, reducing the municipality’s revenue from taxes.
For example, low snowfall and a record dry summer in 2013 and 2014 led to reduced hydropower generation in Canada’s Northwest Territories, with implications for businesses with high power demands such as manufacturing and mining. These industries make up significant portions of Canada’s economy and an increase in water stress is likely to have enduring impacts.
Increasing expenditures on emergency relief can have implications for municipalities’ other budget items, debt reserves and ultimately their ability to repay loans. Likewise, persistent regional disruptions can have material impacts on businesses with key assets in the area.
Introduction: Companies Begin Adapting to Climate Change
Increasingly severe and frequent extreme weather events and chronic stresses are threatening urban communities and economic stability globally. In September 2019, during Typhoon Faxai almost a million people lost power throughout Tokyo and commuter trains were canceled. Evacuations were ordered, disrupting both residential life and business operations. Sony stopped operations at a PlayStation 4 console manufacturing site due to power outages, a Nissan production facility was partly flooded, and 10 shipping containers tipped over at Tokyo Port. In the United States, Hurricane Dorian led to the closure of ports spanning from Miami to Georgetown, with implications for local and global trade and the businesses downstream in the supply chain.
Businesses are increasingly aware that climate change hazards pose financial risks through operational disruptions and repair costs. Some corporations are beginning to implement resilience measures, investing in forward-looking climate risk assessments, considering flood resilience measures for their facilities, and improving their water efficiency. However, asset-level preparedness is only the beginning of essential climate resilience measures that businesses must take. Economic resilience is integrally connected to community resilience because corporations rely on functional transportation, power, and water infrastructure for their operations and depend on the city residents that make up their employee and client bases.
Economic Resilience & Community Resilience: Two Pieces of the Same Puzzle
Economic resilience is critical to community resilience, while business continuity is also dependent on resilient communities and infrastructure. Local businesses underpin local economies, which are key to maintaining stability within a city. As credit rating agencies increasingly integrate physical climate risks into their municipal bond ratings, cities’ preparedness for climate impacts will shape their access to capital. Economic stability is a key element in credit rating agencies’ methodologies for determining municipal credit ratings. Thus, the resilience of local business and economic activities to climate impacts will be a key feature of assessments of city climate resilience.
Likewise, local businesses contribute directly to community resilience. Job opportunities attract new residents to cities and a growing population means a growing tax base, with more financial resources to invest in adaptation. When local businesses recover quickly after extreme events, residents retain their jobs and are more likely to stay in the area, both sustaining the tax base and maintaining social capital—an important element of urban resilience. When businesses are resilient to extreme events they can also offer emergency support, including turning their facilities into shelters, offering food, and donating rescue and first aid equipment, as seen after Hurricane Harvey hit Houston in 2017.
However, it is not a one-way relationship. If a catastrophic hurricane or wildfire destroys homes, displaces residents, and disrupts transportation infrastructure in a city, even climate-proofed corporate facilities will not be able to operate effectively. If employees cannot get to work safely or if they are displaced from the area, business operations may be disrupted. Likewise, if goods cannot be transported to and from a manufacturing facility or storage center, disruptions can ripple through supply chains with wide economic impacts. During Japan’s deadly rainfall in July 2018, Mazda Motor Corporation’s headquarters incurred no major damage. However, operations were halted for days because over 100 employees had flooded homes and many faced challenges traveling to work.
Innovation: Partnering Across Sectors for Shared Resilience
Since the resilience of businesses and cities is inextricably connected, the most effective resilience-building will involve collaborating towards shared resilience. Private and public sector stakeholders often use different terms, have different operating and planning processes, and are unaccustomed to collaborating with counterparts from the public or private sector. The development of a model for private-public partnerships that leverages respective strengths and advances shared climate resilience priorities, is a needed innovation.
Businesses and governments must work to establish trust and create a shared language around climate risks, establishing a foundation for successful collaboration on proactive adaptation and resilience planning as well as disaster response. Each can engage by identifying and contributing their strengths to shared efforts. Businesses can provide resources for the adaptation planning process and implementation, including technical expertise, staff time, and financial resources. For example, Facebook contributed over $200,000 to the development of the San Francisquito Creek Joint Powers Authority’s strategy for sea level rise resilience along the San Francisco Bay, which had implications for its Menlo Park campus. These local vulnerability assessments or adaptation plans can inform businesses’ own resilience-building efforts, while climate risk assessments completed for corporate risk management initiatives can also inform regional resilience planning. Information-sharing goes both ways.
Corporations rely on community adaptation to build resilient regional infrastructure and minimize the impacts of extreme events on their assets. Private-public partnerships can be an important mechanism for building support for these initiatives. For example, the Bay Area business community was influential in passing Measure AA, the regional parcel tax to restore the San Francisco Bay and improve resilience to flooding.
Private-public partnerships can also identify opportunities to increase regional preparedness for extreme events. For example, Airbnb works with San Francisco’s Hub for Emergency Preparedness and Portland, Oregon, to enable hosts to offer their homes for free and for other residents to open their homes to disaster victims in areas affected by an extreme event. This system allowed Airbnb to provide lodging to residents in the wake of Hurricanes Harvey, Maria and Irma in 2017, potentially reducing emigration and increasing the possibility of residents continuing to go to work.
As companies begin to incorporate forward-looking climate risk assessment into their processes, they are increasingly well positioned to engage with the surrounding community to support informed resilience building. Likewise, local governments can bring their understanding of climate change impacts on city infrastructure and operations to inform collaborations with the businesses in their community. Effective partnership, leveraging shared objectives and values, as well as unique capabilities, is called for now to improve economic and urban resilience in the face of changing climate conditions.
This article was originally posted by NewCities and was written with support from Yoon Kim.
Why do climate risks matter for real assets and how can we invest in a more resilient future? There is a growing need to ensure that infrastructure assets and real estate are built to withstand the increasingly severe weather events we experience in a changing climate. Four Twenty Seven Strategic Advisor, Josh Sawislak, discusses how different types of uncertainty will influence physical climate impacts and transition risk outcomes, and how asset design can consider these impacts. Innovating in climate resilience is essential to reduce risk management costs, but it also provides economic opportunities around job creation and product development.
I couldn’t seem to turn on the TV this week without being inundated with coverage of the ongoing floods and tornadoes in the Midwest. The dearth of other content is not just due the doldrums of the sports and political seasons — things are genuinely getting worse on the disaster front. Much worse.
The horrible scenes of twister damaged homes across the Midwest and continuing flooding along the entire Mississippi River merely displaced the stories on recovery efforts from the Hurricanes Maria, Irma, Harvey, Michael as well as the Camp Fire and other drought inflamed disasters in California and the Western U.S.
The Fourth National Climate Assessment predicts more frequent and severe storms, longer and more severe droughts, and the continued and likely accelerating rise of sea levels. All of this will only add to the challenges faced by states, counties and municipalities that are on the front lines of these disasters and to the taxpayers who foot the bill for the hundreds of billions in recovery and rebuilding costs.
The Government Accountability Office found that the increasing frequency and scale of disasters as well as the federal government’s role in funding recovery and flood and crop insurance, make climate disaster a high risk for federal fiscal exposure. GAO reported that the federal recovery efforts alone have cost nearly half a trillion dollars since 2005. To put that spending in context, it represents approximately $4,000 out of the pockets of every American family. Congress will either have to put our nation further into debt or shift the burden to our taxpayers. Addressing climate change is not only an environmental imperative, it’s critical to our nation’s economic security.
It is clear that we have learned a lot about how to respond to, and recover from, major disasters. In the past 40 years. federal agencies, state and local governments, and the extensive network of volunteer organizations such as the American Red Cross, Habitat for Humanity and the Cajun Navy deserve much credit for their growing ability to save lives and help rebuild communities.
It is also clear that just getting better at response and recovery will keep us on the defensive, always playing catch-up. More importantly, the focus and investment post-disaster does little to keep us safe in the first place. We have to retire the old approach that we can just come in after the storm or fire and rebuild — even if we rebuild stronger. Ask anyone who lost their home, business, community or especially a loved one to one of these disasters. They will tell you that as appreciative as they are for the world-class support from governments and volunteers, it’s small comfort for the trauma and years of personal recovery they face. We need to get ahead of the curve by investing in resilient communities and infrastructure so fewer families have to live in devastation.
FEMA’s new pre-disaster fund represents only six cents for every dollar spent on reactive recovery. We need to help communities rebuild, but we also need to be serious about investing to make our communities safe from the coming storms, fires, and other climate threats. While construction to current resilient building codes is the right answer for new construction, it doesn’t address the vast balance of structures built on codes that are old and don’t address the new science and technology of climate resilience. We need to invest in fixing or replacing our failing infrastructure and ensuring that all new construction is resilient to future risks — or we will face this problem all over again.
This doesn’t mean that the federal government alone shoulders the entire responsibility. A successful resilience strategy will only work if we bring both the public and the private sectors into the fight. Resilient building codes are one example, but we also need to value and incentivize resilient investments for everyone.
There is a silver lining to our climate challenges — economic growth. Americans are very good at innovating and building and we can leverage our need to be more resilient by growing the economy with good resilient and sustainable jobs. Some of these jobs are found in building, upgrading and maintaining our new and existing infrastructure to make it resilient to the increasing risks from a climate-impacted world.
Not only can we put Americans to work building our resilient future, we can take the lessons we learn in that effort and export it to the rest of the world. This is an approach that works for all Americans and provides a strong economic as well as environmental future for people in all parts of our nation and the world.
This is what we did to become world leaders in democracy, agriculture, manufacturing and technology in the previous centuries, and we can do it with climate in the 21st century. Climate change is real and addressing it is literally an opportunity we can’t afford to ignore.
Do bond ratings reflect governments’ and businesses’ exposure to physical climate change? Founder & CEO, Emilie Mazzacurati, joins the Bond Buyer’s Chip Barnett to discuss physical climate risk for investors, businesses and governments. Emilie describes the financial sector’s growing awareness of material climate risk in their bond and equity portfolios and shares efforts being taken to understand and address these risk. Chip and Emilie also discuss the challenges cities face when striving to adapt to climate impacts, the benefits of building resilience and the interactions between corporate and community resilience.
FEBRUARY 19, 2019 – SAN DIEGO, CALIFORNIA – Four Twenty Seven receives Climate Change Business Journal Awards for three climate change risk and resilience projects.
The Climate Change Business Journal (CCBJ) released its 10th annual CCBJ Business Achievement Awards, recognizing outstanding business performance in the climate change industry. CCBJ assesses markets and business opportunities across the emerging climate change industry and acknowledged Four Twenty Seven’s contributions to this field through our global dataset on climate risk in real estate, the development of the California Heat Assessment Tool and our contribution to the EBRD-GCECA initiative on Advancing TCFD Guidance on Physical Climate Risks and Opportunities.
The California Heat Assessment Tool (CHAT) earned the Project Merit: Climate Change Adaptation and Resilience award for its innovative approach to helping public health officials, health professionals and residents understand what changing heat wave conditions mean for them, through a free online platform. CHAT is part of California’s Fourth Climate Change Assessment, a state-mandated research program to assess climate change impacts in California, and was developed by Four Twenty Seven, Argos Analytics, the Public Health Institute and Habitat 7 with technical support from the California Department of Public Health.
The European Bank for Reconstruction and Development and the Global Centre of Excellence on Climate Adaptation initiative on Advancing the TCFD Recommendations on Physical Climate Risks and Opportunities earned the Advancing Best Practices: Climate Change Adaptation and Resilience award. This project culminated in a conference and report building on Taskforce on Climate-related Financial Disclosure (TCFD) recommendations and providing common foundations for the disclosure of climate-related physical risks and opportunities. It identifies where further research or market action is needed so that detailed, consistent, industry-specific guidelines can be developed on the methodology for quantifying and reporting these risks and opportunities. Four Twenty Seven and Acclimatise provided the technical secretariat that led the working groups and authored the report.
Four Twenty Seven's monthly newsletter highlights recent developments in climate adaptation and resilience. This month, don't miss the new California Heat Assessment Tool, funding opportunities for risk mitigation and a preview of resilience events at upcoming conferences!
In Focus: Health-based Heat Projections
Four Twenty Seven tool developed under California’s Fourth Climate Change Assessment identifies regions most vulnerable to extreme heat
The California Heat Assessment Tool helps identify neighborhoods with populations vulnerable to heat and overlays projections for heat events likely to cause health impacts. This new research establishes local, health-based thresholds for extreme heat that help public officials, health professionals and residents understand what changing conditions mean for them. The tool can be searched by city, county or zip code and provides data at the census tract level.
Four Twenty Seven developed the tool with funding from the California Natural Resources Agency, in partnership with Argos Analytics, the Public Health Institute and Habitat Seve, and technical support from the California Department of Public Health.
California Releases Fourth Climate Change Assessment
“In California, facts and science still matter,” said Governor Edmund G. Brown Jr. “These findings are profoundly serious and will continue to guide us as we confront the apocalyptic threat of irreversible climate change.”
"State energy officials said the assessment underscores the urgent need not only for swift global reductions in greenhouse gas emissions but also local actions to protect California from warming that’s already threatening people, natural resources and infrastructure." The Los Angeles Times reports.
“We’re seeing that in the fire situation, we’re seeing that in sea level rise, we’re seeing that in heat spells, in declining snowpack,” said California Energy Commission Chairman Robert Weisenmiller. “The climate is changing now so we need to be adapting our communities.”
Four Twenty Seven at GCAS and PRI
Join our GCAS side event on Sept. 11 in San Francisco
Safeguarding local infrastructure, businesses and the economies they support requires an understanding of the interconnected nature of the climate vulnerabilities of communities, businesses and financial institutions.
This affiliate side event, hosted by Four Twenty Seven, will feature investor, business and government thought leaders to discuss cutting edge projects and collaboration to build community and economic resilience. From 8:30-11:30am on Sept. 11 at Arup.
This is a free invite-only event with limited capacity. Please express interest to be added to the list and we will review and confirm your registration shortly.
September 13 from 9:30am-1:30pm: Climate Resilience & Adaptation Investment: Emilie Mazzacurati joins a panel on "Climate Resilience Investment Risks and Metrics". Hosted by Lightsmith Group and WillisTowersWatson. Invite-only.
Looking for other applicable events? We've compiled a list of resilience-related side events that are pertinent for investors, corporations and communities. Browse our Google Doc, updated on an ongoing basis, to spot the most interesting side events on climate risk and climate science. Email firstname.lastname@example.org if you'd like your event to be included in our curated list.
Today from 2:55-4:10pm: Director of Advisory Services, Yoon Kim, will moderate a panel on "Heat Resilient Transit and Cool Streets."
Today from 4:25-5:50pm: Yoon will moderate a panel,"Who Pays? The Implications of Liability, Insurance, And Credit Ratings on Adaptation Finance."
Wednesday from 9:30-10:45am: Manager, Advisory Services, Kendall Starkman will moderate a panel, "From Idea to Action: Mobilizing Adaptation Implementation Through Partnerships."
Wednesday at 1:30pm: Kendall will speak at the event, "ASAP Members Lead the Transfer of Adaptation Takeaways to GCAS tomorrow at 1:30pm.Editor, Natalie Ambrosio, will speak at the annual in-person ASAP meeting during the second half of this session.
Funding Opportunities to Build Resilience
Several funding opportunities for hazard mitigation projects in California
PDM and FMA Funding Opportunities:There is $235,200,000 nationwide for the PDM Program and $160,000,000 nationwide for the FMA Program, which provide funding for the development of local hazard mitigation plans (LHMPs) and implementation of hazard mitigation projects.The Notice of Interest for both grants is due by September 4, 2018. For more information visit Cal OES or email PDFM@caloes.ca.gov.
Hazard Mitigation Grant Program (HMGP) – DR-4382 funding opportunity: HMGP funding is available statewide for any eligible mitigation activity. Eligible activities also include Climate Resilient Mitigation Actions (CRMAs), such as actions supporting aquifer storage and recovery, flood diversion and storage, floodplain and stream restoration, and green infrastructure methods. More info forthcoming on Cal OES. Or contact HMGP@caloes.ca.gov for more information.
Join the Four Twenty Seven team in the field at these upcoming events:
September 11 - Building Community and Economic Resilience: San Francisco, CA: Four Twenty Seven will host a side event alongside the Global Climate Action Summit on Sept 11 to discuss the role of investors, businesses and governments in contributing to climate-resilient cities and infrastructure. Express interest.
September 12-14 – PRI in Person, San Francisco, CA: Visit the Four Twenty Seven booth and meet with our team at this annual gathering of responsible investment industry leaders. More details above.
September 12-14 – Global Climate Action Summit, San Francisco, CA: CEO Emilie Mazzacurati to speak at a session on resilience in this convening of global leaders meant to propel action around the Paris Agreement. More details above.
September 24-26 – 2018 Great Lakes Adaptation Forum, Ann Arbor, MI: Director of Advisory Services, Yoon Kim, will join this gathering of practitioners and scholars dedicated to building regional resilience.
September 24-30 – Climate Week NYC, New York, NY: Senior Analyst, Lindsay Ross, will join discussions around physical climate risk and resilience at this annual event.
October 4 – Japan Electronic Trading Conference 2018, Tokyo, Japan: CEO Emilie Mazzacurati will speak about how physical climate risk affects investing strategies at this gathering of the FIX Trading Community.
October 8-11 – ULI Fall Meeting, Boston, MA: Founder & CEO, Emilie Mazzacurati to join a panel on assessing climate risk in the real estate industry.
October 8-12 – Paris InfraWeek, Paris, France: Director, Europe, Nathalie Borgeaud, will join this discussion of recent developments in infrastructure finance.
October 15 - Deutsche Bank ESG Summit, Boston, MA. COO Colin Shaw will join a panel on climate risk in equities. Invitation-only.
October 16-18 – Verge 18, Oakland, CA: Yoon Kim will join this convening focused on developing a resilient, green economy.
October 23-26 – SOCAP18, San Francisco, CA: Members of the Four Twenty Seven team will participate in the annual Social Capital Markets conference.
November 26-28 – UNEP FI Global Roundtable & Climate Finance Day, Paris, France: Emilie Mazzacurati and Nathalie Borgeaud will participate in these two evens dedicated to mobilizing the financial sector to create a sustainable financial system.
December 3-14 – COP24, Katowice, Poland: Nathalie Borgeaud and Yoon Kim will attend the 24th Conference of the Parties to the United Nations Framework Convention on Climate Change and participate in side events.
December 5-6 – RI Americas, New York, NY: Emilie Mazzacurati to join a panel on climate risk in real estate markets. Visit the Four Twenty Seven booth.
December 10-14 – AGU Fall Meeting, Washington, DC: Director of Analytics, Nik Steinberg, Senior Data Analyst, Josh Turner and Lindsay Ross will join this annual convening of the Earth and space sciences community.
As California’s climate warms, residents increasingly endure extreme heat events that adversely impact public health. This exacerbates existing risks and will bring new challenges for different regions in the state, threatening the efficacy of traditional intervention strategies. Current thresholds for heat alerts are based on temperatures that exceed historical statistical thresholds, rather than temperatures that cause public health impacts. These ‘health-neutral’ thresholds may underestimate the health risks for the most sensitive populations. The new California Heat Assessment Tool (CHAT) is based on research that establishes local, health-based thresholds for extreme heat that help public officials, health professionals and residents understand what changing conditions mean for them. CHAT is part of California’s Fourth Climate Change Assessment, a state-mandated research program to assess climate change impacts in California, and was developed by Four Twenty Seven, Argos Analytics, the Public Health Institute and Habitat 7 with technical support from the California Department of Public Health.
Explore CHAT at cal-heat.org. This online tool advances the understanding of what types of heat waves pose public health risks and examines how the frequency and severity of local heat waves are expected to change over time due to climate change.
Current climate change projections show that a typical California summer in 2100 may be 4-5° F warmer than today. Heat waves are also lasting longer, occurring later into the summer season and in areas less accustomed to heat waves.
Elderly or very young people, outdoor workers and individuals with preexisting health conditions or limited resources are most sensitive to the impacts of extreme heat and may be disproportionately affected. Some of these sensitive, or frontline, populations may experience adverse health impacts at temperatures 6-8° F lower than the general population.
Current thresholds for heat alerts are based on temperatures that exceed certain statistical thresholds, rather than temperatures that cause public health impacts. These health-neutral thresholds may underestimate the health risks for the most sensitive populations.
The online California Heat Assessment Tool (cal-heat.org) allows users to visualize projected changes in heat events that cause adverse health impacts, while also exploring data on social, health and environmental factors that contribute to heat vulnerability.