January 29, 2020 – 427 ANALYSIS. As Australia’s bushfires rage on, questions arise on the long-term impacts on human health, biodiversity and the economy. This analysis shares lessons learned from the recovery from recent wildfires in California to offer some pointers of what might happen when the bushfires finally subside. While immediate economic impacts include emergency relief bills, business interruptions, costly loss of goods and reduction in tourism, the long-term impacts vary based on municipalities’ financial resources, economic make-up and preparedness.
Real Estate Markets
Over the past three years wildfires have razed thousands of buildings across California, destroying multiple communities. The impacts on real estate markets varies depending on the share of properties destroyed in a local community, as well as insurance penetration. After five percent of Santa Rosa’s housing stock burned in 2017, the city experienced an increase in property prices and rents following the fire: displaced households needed new dwellings, construction workers and emergency relief officials needed housing and amenities, and local businesses found new clientele. Although an estimated 3,300 people left Sonoma County after the 2017 fires, in Santa Rosa, CA, rebuilding has occurred more rapidly than expected. The areas affected by the fires had relatively high insurance rates, and families were able to pay for the reconstruction of their houses. Irreplaceable personal items were lost, but the city experienced a mini-economic boom due to construction in the area.
In contrast, the city of Paradise went from 26,000 residents before the Camp Fire down to 2,000. More than one year later, only a handful of houses have been rebuilt, and many residents struggle with whether they should move back. Insurance penetration was much lower in Paradise, and many low-income households cannot afford to rebuild their lives there.
Aside from short-term shortages in housing stock, long-term impacts on real estate and local economies depend on two main factors: whether the area experienced a permanent or long-term population loss, and whether insurance companies continue to offer policies for the area. This phenomenon has also been at play after other climate-related events, such as when Hurricane Maria hit Puerto Rico. The storm led to a four percent decrease in the island’s population.
Impacts can also indirectly touch other communities near wildfires: the same Camp Fire that devastated Paradise narrowly missed the neighboring city of Chico, CA. While Paradise’s economy has yet to recover, within three months of the fire, Chico’s population grew by 20%, with the addition of about 20,000 people. While Chico became the nation’s hottest real estate market the month after the fire, it also missed relief funds offered to towns touched by flames. From a sewer system now tasked with transporting 600,000 more gallons per day, to the need for more police force and a higher hospital demand, a year after the event, the city struggled to accommodate a population the city planners hadn’t expected for a decade.
In California, the biggest impact was on the utility sector. As power lines and electric equipment were found to have started the wildfires, the liability ultimately resulted in Pacific Gas & Electric’s (PG&E) bankruptcy, coined “the first climate-change bankruptcy.” In Australia fires are most often started by dry lightning so utilities are not so exposed to liability risk, but may still be exposed to significant costs from disruptions and repairs associated with wildfires.
The insurance sector is also very exposed. Merced Property and Casualty local insurance company went bankrupt after California’s Paradise fire. The company had USD23 million (AUD34 million) in assets and owed USD64 million (AUD94 million) in liabilities after the fire, which the state of California took over after the company defaulted. Insurance claims for the bushfires have already reached around AU939 million (USD646 million). Australian insurance companies could face material losses, particularly those with concentrated portfolios of properties or companies in regions affected by the fires.
For example, insurer IAG is the primary insurer in New South Wales and is thus expected to face the most financial risk from the current fires. IAG and Suncorp have both temporarily stopped selling wildfire insurance in exposed areas of Australia, to prevent last-minute insurance purchases. The final bill may be absorbed by reinsurance companies, which also need to contend with multiple, costly events globally. Increased losses, even if they do not lead to a bankruptcy, can also open the door to liability. In 2019 insurance giant QBE saw a shareholder resolution regarding its lack of preparedness for climate impacts.
Beyond utilities and insurance, businesses across sectors face several short-term risks from wildfires, including business interruptions, labor shortages and reduced consumer activity due to evacuations or smoke which can affect urban centers not themselves touched by flames. Businesses may also face increased costs due to equipment and property damage or loss. In the long term, recurring wildfires could decrease attractiveness of certain parts of Australia, which would reduce companies’ hiring pool and decrease tourism revenues.
Residents’ decisions to stay in a recovering area is largely affected by whether insurance companies choose to provide coverage or pull out after wildfires. This in turn, is a key factor in the viability of long-term development and the strength of cities’ tax bases. Faced with potential population loss, local governments may attempt to provide public insurance if private insurers leave a city or region, such as the National Flood Insurance Program (NFIP) in the U.S. However, as seen with the NFIP, this mechanism can lead to unsustainable development and a moral hazard, encouraging unwise economic decisions by shifting risks from the individual buying property, to the government and therefore the public.
The desire to help an area rebuild needs to be balanced against a forward-looking perspective on the new realities of climate change. As temperatures increase, droughts become more common and wildfire conditions become more frequent, climate change will make some areas no longer suitable for human settlement. In California some insurers have stopped offering wildfire insurance to certain fire-prone counties. After careful deliberation the state recommended the creation of a Wildfire Victims Fund to help pay claims to wildfire victims, while also supporting wildfire mitigation. However, this comes alongside recommendations to require home and community fire risk reduction standards, establish a development fee for new construction in the wildland-urban interface, and mandate that new development must be reachable by firefighters within a maximum amount of time.
The impact of wildfires on a city’s credit rating may also affect its economic prospects after an event. Issuers in Sonoma County were not downgraded after the 2017 fires, because of their strong credit quality, insurance coverage, commitment to rebuilding and long-term economic viability. The County has an emergency reserve fund, which helped make up the shortfall in property taxes for destroyed properties, assuaging any concern from rating agencies on their balance sheet post-disaster.
However, a Moody’s credit analyst noted that smaller, less well-resourced communities like those burned during the 2018 fires in rural Shasta County, will face less rapid rebuilding, which means less revenue and more difficulty repaying their debt. This highlights the need for proactive preparedness efforts, particularly as those municipalities in particular need of financing may see credit declines if they experience wildfire loss.
Hidden Costs: Health Impacts
Wildfires’ impacts on human health can be long-lasting and widespread. While Paradise, CA burned down in 2018 San Francisco, about 200 miles away, had the worst air quality in the world. This led to school closures and business disruptions during the event, but its impacts are still being felt. Three to five months after Sonoma County’s 2017 fires there was a 20% increase in emergency room visits for breathing challenges, as well as a 20% increase in visits for cardiac problems three months after those fires. While populations are advised to stay inside to shelter from smoke, many evacuation victims do not have that option.
Suburban wildfire smoke is particularly dangerous because burning gas stations, buildings, cars and other man-made materials releases many toxins, along with tiny PM 2.5 particles. The long-term impacts of inhaling countless chemicals are not yet fully understood but will likely exacerbate the well-documented damage to lungs and hearts caused by PM 2.5 particles. As public health costs increase, municipalities’ expenses may rise and human productivity may decline, posing additional risk to economies and communities made fragile by wildfire.
Preparing for a New Normal
Recent attempts at risk mitigation highlight the challenges to improve prevention. In October and November 2019 over a million Californian’s lost power during multiple PG&E “Public Safety Power Shutoffs,” meant to reduce the risk of wildfire during “red flag” conditions, with high winds and warm temperatures. With less than a day’s notice in some cases, residents, businesses and schools around San Francisco’s Bay Area spent days without power. Elderly and those relying on medical equipment faced life threatening hardship, local businesses experienced significant loss, long-term, high-profile research was disrupted, and costs of the event were expected to be around USD2 billion (AUD3 billion).
Australia and California used to share firefighting resources since they didn’t need them at the same time, and firefighting contractors built their businesses around staggered fire seasons. Now, Australia and California fight fires concurrently, business models must shift and municipalities must reallocate resources.
As climate change increases the occurrences of wildfires across the globe, policymakers and communities will need to balance these considerations and invest in adaptation and resilience to limit the impact of future fires.
Natalie Ambrosio contributed to this analysis.
Four Twenty Seven works with investors and businesses to provide portfolio hotpot screenings and real time due diligence with site-specific data on heat stress, water stress and other climate risks. Wildfire analytics are forthcoming. Contact us for more detailed analysis and site-specific data on climate risk exposure and its economic impacts.
Director of Analytics, Nik Steinberg, discusses wildfire risk, impacts and prevention efforts, on the Midday Briefing. Nik explains implications of increasingly frequent and severe wildfires for the insurance industry and homeowners and shares several ideas for adapting to these risks. While fires have always occurred, climate change is changing the landscape of the wildland-urban interface and residents and policy-makers must understand their wildfire risks and implement preventative strategies. The economic implications are huge for utilities, shareholders and communities, but with intentional planning businesses, governments and residents have the opportunity to mitigate loss.
June 5, 2018 – 427 REPORT. Shareholder engagement is a critical tool to build resilience in investment portfolios. Investors can help raise awareness of rising risks from climate change, and encourage companies to invest in responsible corporate adaptation measures. We identify top targets for shareholder engagement on physical climate risks and provide data-driven strategies for choosing companies and approaching engagement. Our report includes sample questions as an entry point for investors’ conversations about climate risk and resilience with corporations.
Shareholder engagement on climate change has grown tremendously in recent years. Over 270 investors, managing almost $30 trillion collectively, have committed to engage with the largest greenhouse gas emitters through the Climate Action 100+. In addition to their ongoing efforts to engage and encourage companies to reduce emissions, investors are becoming aware of the financial risks from extreme weather and climate change. Climate change increases downside risks: a negative repricing of assets is already being seen where climate impacts are most obvious, such as coastal areas of Miami. As climate change can negatively impact company valuations, investors must strive to bolster governance and adaptive capacity to help companies build resilience.
This Four Twenty Seven report, From Risk to Resilience – Engaging with Corporates to Build Adaptive Capacity, explains the value of engagement, for both corporations and investors and describes data and case studies to drive engagement strategies. While news coverage of extreme weather events can clue investors in to which corporations may be experiencing climate-driven financial damage, new data can empower investors to identify systemic climate risk factors and proactively engage companies likely to experience impacts in the future. Reactive engagement strategies based on news stories can also use data to more thoroughly explore corporations highlighted in the news, by examining other hazards that may pose harm to their operations.
The report also identifies the Top 10 companies with the highest exposure to physical climate risk in the Climate Action 100+ and calls for investors to leverage their engagement on emissions to also address urgent issues around climate impacts and building resilience.
Once they identify companies, shareholders can use a variety of questions to gain a deeper understanding of companies’ vulnerability to climate hazards and their governance and planning processes, or adaptive capacity, to build resilience to such impacts. The report provides sample questions for different components of climate risk, including Operations Risk, Market Risk and Supply Chain Risk, as well as Adaptive Capacity.
• The impacts of a changing climate pose significant downside risk for companies; a risk bound to increase as the climate continues to degrade.
• At present, investors are likely to become aware of exposure to financial damages from extreme weather events only after they have occurred. Disclosure is limited but gaining traction.
• Corporate engagement is a tool to encourage companies to deploy capital and technical assistance to build resilience in their operations and supply chains.
• Investors can select target companies reactively based on prior incidents or pro-actively identify firms that would benefit from resilience plans.
• Investors should question companies on their exposure to physical climate risks via their operations, supply chain and market, as well as how they are building resilience to these risks through risk management and responsible corporate adaptation strategies.
April 25, 2018 – 427 TECHNICAL BRIEF. Financial institutions, corporations, and governments increasingly strive to identify and respond to risks driven by physical climate impacts. Understanding the risks posed by climate change for facilities or infrastructure assets starts with conducting a risk assessment, which requires an understanding of the physical impacts of climate change. However, climate data in its raw form is difficult to integrate into enterprise risk management, financial risk modelling processes, and capital planning. This primer provides a brief introduction to climate models and data from a business or government perspective.
The first of several reports explaining the data and climate hazards analyzed in Four Twenty Seven’s equity risk scores and portfolio analytics, Using Climate Data unpacks the process through which raw climate data is transformed into usable metrics, such as future temperature projections, to help financial, corporate and government users productively incorporate climate-based analytics into their workflows. Beginning by explaining what a global climate model is, the report explains climate data’s format, computational choices to hedge uncertainty and resources for aggregated climate projections tailored to specific audiences.
The year 2017 will stay on the record as one of the most expensive years to date for climate and weather disaster events. The U.S. experienced 16 weather and climate disasters that caused over $1 billion in damages, tying the record year of 2011 for the most billion-dollar disasters. From summer through the fall, wildfires in various parts of California led to fatalities, destruction of entire communities, and damage costs of $18 billion, with economic consequences that will continue to impact the region. These events have highlighted that climate change has already begun to and will continue to impact local communities and businesses, and that local economies will benefit from more coordinated resilience planning.
Communities across the U.S. are taking steps to identify their climate change risks and enhance their resilience to changing climate conditions. Many local governments have assessed their vulnerabilities and are developing resilience plans with support from local stakeholders. However, a key set of stakeholders are often not at the table: businesses. Collaboration between local governments and the business community on climate change resilience remains limited. As local and regional climate change planning continues, it becomes increasingly important for local governments to engage with businesses, both large and small, on these issues.
The success of businesses and communities is intertwined
Many larger companies recognize the impacts of climate change on their operations, including risks to physical assets, disruptions to supply chains, and impacts on their workforce. In fact, some businesses, like Google, are examining how to develop company resilience strategies that address changing climate conditions. Businesses are also dependent on public infrastructure and local government services, and climate risks on these “outside the fence” components are much harder for businesses to evaluate. In fact, a number of companies have highlighted these uncertainties as a major barrier in addressing adaptation.
Local governments are dependent on the private sector in many ways. Businesses are essential to the economic health and growth of communities. Business interruptions can affect the quality of life for residents, disrupt the local economy, and reduce tax revenues. The costs of Hurricane Harvey are still being evaluated, but preliminary estimates suggest that lost economic output from this storm was in the range of $9 billion to $11 billion, including $540 million for goods-producing industries and $141 million for oil and gas industries. The October 2017 wildfires in California’s wine country are estimated to have caused economic losses between $6 and $8 billion dollars due to property damage and business interruptions alone, with $789 million in commercial property claims. These costs do not include the potential losses to the wine industry for many years to come.
Local governments have a strong interest in ensuring that businesses are resilient and remain operational as the climate continues to change. Companies will also benefit from engaging with the public sector on community resilience to enhance their business continuity plans and support their employees. In addition to better protecting their employees and operations, this type of collaboration will help businesses better understand community needs.
Businesses can assist local governments with expertise and solutions
Larger businesses often already understand local risks because of internal risk management processes. Risk management and emergency management plans, along with drills and training exercises with employees, help businesses prepare for extreme events. Local governments can coordinate with businesses on risk management, including participating in drills and trainings, to build and maintain community resilience.
Local governments can also use larger companies’ expertise and data on risk. Businesses may be monitoring information that could be relevant to local resilience planning. For example, utilities often track potential risks to their assets, such as those related to storms (e.g., wind, precipitation, flooding), wildfire, and temperature impacts on energy demand. This information can be helpful to local decision-makers in both emergency management and long-term resilience planning.
The private sector also offers opportunities in services and solutions. Businesses are often interested in developing and improving technologies, engineering approaches, technical assistance, and opportunities to connect with their communities. For example, Airbnb offered disaster relief to people impacted by the California wildfires, connecting displaced residents to available housing. The company also worked with the City of San Francisco’s Department of Emergency Management to share their lessons learned from Superstorm Sandy. Airbnb is also partnering with various local governments to help communities prepare for and recover from disasters. Local governments’ suggestions for climate change solutions and services can help businesses tailor their products to best serve the community.
In addition, financing for implementing community resilience can often be a challenge for local governments. The private sector can offer financing solutions to help fund climate change resilience. For example, Pacific Gas and Electric Company (PG&E) is investing $1 million over five years through their Better Together Resilient Communities grant program to support local climate resilience initiatives in California.
Local governments can share data and information with businesses
Some local governments have undertaken vulnerability assessments and climate change scenario planning for their regions. The data and results from these studies can be shared with businesses to help them understand what assumptions are being used by local governments, and whether their scenarios align, which will be increasingly important to ensure regional coordination as conditions change.
While larger companies may undertake scenario planning and vulnerability assessments, most small businesses do not. However, small businesses can also benefit from data and information sharing. Small companies do not often have the expertise or resources to adequately assess climate change risks and undertake resilience planning. Local governments can share information with small businesses to help them better understand their potential risks and prepare for extreme events. In California, Valley Vision has developed the Capital Region Business Resiliency Initiative to help engage the small business community in resilience planning. This effort helps small businesses engage with local stakeholders to understand potential risks and provides resources to help these businesses plan for disaster resilience.
Local governments can engage with businesses through existing networks or by creating new processes to assist with engagement
Local governments can engage with both small and large businesses through networks and organizations for the private sector, like local chambers of commerce, trade associations, and other business networking groups. For example, the City of Annapolis has engaged the Anne Arundel County Chamber of Commerce and the Downtown Annapolis Partnership in its Weather It Together initiative, which is focused on adapting the historic community to minimize the risks associated with flooding. Through this effort, local businesses are part of the planning process to help the community become more resilient. The City of Cambridge, Massachusetts has also engaged businesses in long-term planning efforts like the Cambridge Compact and the city’s Climate Change Preparedness & Resilience Plan. Establishing public-private partnerships focused on climate resilience will also help to facilitate conversations and collaboration between these two sectors.
Local governments may already engage with businesses individually, but it can be helpful to set up an ongoing process for involving the private sector in resilience planning. For example, business representatives can participate in local planning and advisory committees, contributing their perspectives and identifying any key issues for the business community. Effectively engaging the business community will often require targeted outreach and potentially different strategies, as businesses may not be aware of ongoing stakeholder processes or may not realize their relevance to company needs. Some communities have incorporated businesses into resilience planning through regional climate collaboratives. Several regional climate collaboratives in California focus on engaging different stakeholder groups, including businesses, to further climate change planning. For example, the Sierra Climate Adaptation and Mitigation Partnership was founded by the Sierra Business Council and has various business members, including ski resorts and forestry companies.
Effectively preparing for climate change’s impacts requires that cities coordinate with many different stakeholders. Businesses, public agencies, community groups, and citizens are all important to the discussion on community resilience, as they will all be impacted by climate change and have important ideas to contribute. Engaging the private sector is an important way for local governments to improve community resilience, and will benefit both the public and private sector through information sharing, aligning needs and goals, and developing multi-sector networks.
Climate change impacts are already being felt in California and will continue to affect populations, infrastructure and businesses in the coming years. A resilient California is a state with strong infrastructure, communities and natural systems that can withstand increasingly volatile conditions. Executive Order B-30-15, signed by Gov. Brown in April 2015, mandates that all state agencies must consider climate change and that they must receive guidance on how to effectively do so.
To support the implementation of this Executive Order, the California Governor’s Office of Planning and Research released last week “Planning and Investing for a Resilient California,” a guidance document outlining strategies to include climate adaptation in decision-making. Four Twenty Seven CEO Emilie Mazzacurati served on the Technical Advisory Group that wrote the report, which aims to provide guidance for state agencies to both plan for future climate conditions and also conduct planning itself in a new way.
The guide outlines four steps for integrating climate into decisions and then looks specifically at investing in resilient infrastructure, providing actionable guidelines for building a resilient California.
1. Characterize climate risk
2. Analyze climate risk
3. Make climate-informed decisions, by using resilient design guidelines
4. Track and Monitor Progress
Several state agencies are already integrating climate change into their planning. The Department of Water Resources used a scenarios approach to capture uncertainty in climate, but also in demographics, economic change and land use. Examining 22 different climate scenarios, analyzing different temperature and precipitation possibilities and accounting for growth uncertainty, the agency looked at 198 possible futures. This allowed them to examine different possible management approaches and how they may reduce certain vulnerabilities. This quantitative estimate provided a range of future conditions and possible strategies for the agency to consider in its planning.
The state of California invests in infrastructure through funding of onsite renewable energy and telecommunications, providing financial assistance to projects not owned by the state and providing capital for all steps of infrastructure development owned by the state. Regardless of the type of investment, climate change impacts must be considered. It’s important to first determine if there is a way to accomplish a goal by using natural infrastructure. Assessing the potential for natural infrastructure can be done by examining the landscape, exploring Cal-Adapt’s projections for the area, analyzing potential co-benefits such as improved ecological services or water health and consulting with other groups. It’s important to compare the risk reduction and complete costs and benefits of the natural infrastructure approach with the non-natural alternative. Using full life-cycle accounting, that considers all of the costs from a project including building, operating, maintaining and also deconstructing, is essential for evaluating proposed projects. Prioritizing infrastructure with climate benefits and integrating the resilient decision making principles will ensure that investments are resilient and climate-conscious.
This guidance document is a continuation of California’s ongoing leadership in climate adaptation, which includes Senate Bill No. 379 Land Use: General Plan: Safety Element, passed in 2015. This bill mandates that every city must include adaptation and resilience strategies in General Plan Safety Elements and Local Hazard Mitigation Plans by 2017. Read about Four Twenty Seven’s work helping cities in Alameda County implement these requirements and learn about our advisory services for adaptation planning, policy consulting and vulnerability assessments.