Lenders’ Guide for Considering Climate Risk in Infrastructure Investments

Climate change poses multifaceted physical risks for infrastructure investors, affecting revenue, maintenance costs, asset value and liability. According to the New Climate Economy report, global demand for new infrastructure investment could be  over US$90 trillion between 2015 and 2017. It is becoming increasingly clear that climate change must be considered in all infrastructure investment and construction.

Four Twenty Seven, in collaboration with our partners Acclimatise and Climate Finance Advisers, published a “Lenders’ Guide for Considering Climate Risk in Infrastructure Investments” to explain the ways in which physical climate risks might affect key financial aspects of prospective infrastructure investments.

Climate Change and Infrastructure

The guide begins with a discussion of climate risk, acknowledging that climate change can also open opportunities such as improving resource efficiency, building resilience and developing new products. It provides a framework for questioning how revenues, costs, and assets can be linked to potential project vulnerability arising from climate hazards.

Revenues: Climate change can cause operational disruptions that lead to a decrease in business activities and thus decreased revenue. For example, higher temperatures alter airplanes’ aerodynamic performance and lead to a need for longer runways. In the face of consistently higher temperatures, airlines may seek airports with longer runways, shifting revenue from those that cannot provide the necessary facilities.

Costs/Expenditures: Extreme weather events can cause service disruptions, but can also damage infrastructure, requiring additional unplanned repair costs. For example, storms often lead to downed power lines which disrupts services but also necessitates that companies spend time and money to return the power lines to operating conditions.

Assets: Physical climate impacts can decrease value of tangible assets by damaging infrastructure and potentially shortening its lifetime. Intangible assets can be negatively impacted by damages to brand image and reputation through repeated service disruptions.

Liabilities: Climate change is likely to pose increasing liability risk as disclosure and preparation requirements become more widespread. As infrastructure is damaged and regulations evolve, companies may face increased insurance premiums and costs associated with retrofitting infrastructure and ensuring compliance.

Capital and Financing: As expenditures increase in the face of extreme weather events, debt is also likely to increase. Likewise, as operations and revenues are impacted and asset values decrease, capital raising may become more difficult.

The guide also draws attention to the potential opportunities emerging from resilience-oriented investments in infrastructure. There are both physical and financial strategies that can be leveraged to manage climate-related risks, such as replacing copper cables with more resilient fiber-optic ones and creating larger debt service and maintenance reserves.

Climate Risks and Opportunities: Sub-Sector Snapshots

The guide includes ten illustrative “snapshots” describing climate change considerations in the example sub-industries of Gas and Oil Transport and Storage; Power Transmission and Distribution; Wind-Based Power Distribution; Telecommunications; Data Centers; Commercial Real Estate; Healthcare; and Sport and Entertainment. Each snapshot includes a description of the sub-sector, an estimation of its global potential market, examples of observed impacts on specific assets, and potential financial impacts from six climate-related hazards: temperature, sea-level rise, precipitation & flood, storms, drought and water stress.

Commercial real-estate, for example, refers to properties used only for business purposes and includes office spaces, restaurants, hotels, stores, gas stations and others. By 2030 this market is expected to exceed US $1 trillion per annum compared to $450 billion per annum in 2012. Climate impacts for this sub-sector include hazard-specific risks and also include the general risk factor of climate-driven migration which drives shifts in supply and demand in the real estate market.

As heat waves increase in frequency, people will likely seek refuge in cool public buildings, leading to increasing property values for those places such as shopping malls that provide air-conditioned spaces for community members. Increasing frequency and intensity of storms may damage commercial infrastructure, leading to recovery costs and increased insurance costs. Real estate managers may have to make additional investments in water treatment facilities to ensure the viability of their assets in regions faced with decreased water availability. An example of the financial impacts of climate change on this sub-sector can be seen in Houston after Hurricane Harvey. After the hurricane hit Texas in August 2017, approximately 27% of Houston commercial real estate was impacted by flooding and these 12,000 properties were worth about US$55 billion.

Download the Lenders’ Guide. 

For more guidance on investing for resilience, read the Planning and Investing for a Resilient California guidance document and the GARI Investor Guide to Physical Climate Risk and Resilience.

Local Adaptation Planning – Process Guide

United States cities already face challenges from climate change due to impacts on communities, infrastructure and other assets and resources. Local jurisdictions that repair infrastructure, make land use decisions, and engage communities in a way that accounts for ongoing and future change can help make their cities more resilient. A growing number of local jurisdictions are adopting plans and engaging in voluntary commitments to mitigate and adapt to climate change. A wide range of available resources makes this possible, and climate legislation increasingly requires it, but both can also make implementing a cohesive, streamlined adaptation strategy difficult. This Process Guide outlines an effective adaptation planning process for local governments.

Through our work assisting eight cities in Alameda County in responding to California’s Senate Bill No. 379 Land Use: General Plan: Safety Element (Jackson) (SB 379), Four Twenty Seven has developed a streamlined process to support local governments in their efforts to integrate climate risks into key planning efforts, such as local hazard mitigation plans, general plans, and climate action plans. SB 379 requires cities and counties in California to incorporate adaptation and resilience strategies into General Plan Safety Elements and Local Hazard Mitigation Plans starting in 2017. Our process for effective climate adaptation planning includes 1) a hazard assessment to determine vulnerability and 2) identification of appropriate adaptation options.

By starting with a climate hazard assessment, cities can identify the specific hazards that pose the greatest threats to their assets. After applicable climate hazards are identified, it is important to develop adaptation plans that build on and can be integrated into existing city policies. This Guide outlines our process for assisting cities with adaptation planning, and identifies useful resources, tools and process elements to inform integrated climate hazard assessment and adaptation planning.

Download the full Process Guide.

Read a Case Study on Integrating Climate Risks into Local Planning in Alameda County and learn about our advisory services in adaptation planning, policy consulting and vulnerability assessments.

Planning and Investing for a Resilient California – Guidance Document

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.

Four Steps to Planning for Resilience

1. Characterize climate risk

  • Determine the scale and scope of climate risk, ranking it as low, moderate or high impact.
  • Identify the vulnerability of impacted communities and systems, ranking them as adaptable, moderately adaptable or vulnerable.
  • Define the nature of the risk,  ranking it as temporary, limiting or permanent.
  • Identify the economic impacts of the risk, ranking them as low, medium or high.

2. Analyze climate risk

  • Determine which emissions scenario (RCP) to plan for: the higher the risk identified in step 1, the higher the necessary RCP scenario.
  • Determine complexity of uncertainty analysis needed: the higher the risk, the more important the uncertainty analysis.
  • If a project is in a current coastal zone, or a location that will be coastal by 2050 or 2100, planning must account for sea level rise.
  • Worst case scenarios should be identified for reference, but don’t need to be planned for.
  • Cal-Adapt is an interactive online tool, displaying climate impacts by hazard, with downloadable downscaled data.

3. Make climate-informed decisions, by using resilient design guidelines

  • Prioritize approaches that integrate adaptation and mitigation.
  • Prioritize actions that promote equity and community resilience.
  • Coordinate with local and regional agencies, including governments and community based organizations.
  • Prioritize actions that use natural infrastructure.
  • Base all choices on the best science.

4. Track and Monitor Progress

  • Develop metrics and report regularly to foster transparency and accountability.

Case Study: California Water Plan 2013

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.

Infrastructure Investment

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.

Download the full report.

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.

 

 

 

Towards a Resilient Financial Sector: an Initiative from the European Bank of Reconstruction and Development

Four Twenty Seven provides the technical secretariat for the European Bank for Reconstruction and Development (EBRD) and Global Centre of Excellence on Climate Adaptation (GCECA) initiative focused on building climate resilience in the financial sector.   Over the coming months, Four Twenty Seven and our partners, Acclimatise, will be releasing briefing papers on physical climate risk and resilience metrics for the financial sector. The project will culminate in an event in May 2018 in London: “Towards a Resilient Financial Sector: Disclosing Physical Climate Risk & Opportunities”.

Read EBRD’s full press release below:

“The EBRD is partnering with the Global Centre of Excellence on Climate Adaptation (GCECA) in a joint initiative to help strengthen the resilience of the financial sector to the impacts of climate change.

Investors and businesses are becoming increasingly aware of the need to understand and manage the risks associated with climate change. In order to explore options for addressing these issues, the EBRD and GCECA will organise a conference entitled “Towards a Resilient Financial Sector: Disclosing Physical Climate Risk & Opportunities”, to be held at the EBRD’s London Headquarters on 31 May 2018.

The conference will bring together the financial, technical and policy perspectives to shape market action on climate resilience. The focus will be on improving financial sector awareness of climate risks and their impacts on investments, as well as facilitating the emergence of climate risk and resilience metrics, and identifying ways on which investors and businesses can integrate climate change intelligence into their business strategies and investment planning.

Announcing the cooperation Craig Davies, EBRD Head of Climate Resilience Investments, said: “We are very pleased to partner with the GCECA, the first international institution with a specific focus on climate change adaptation. Building climate resilient economies requires broad market action by businesses and investors, alongside effective government policies. We see great opportunities for working with the GCECA and a wider range of other stakeholders to enable businesses and investors to realise the value that can be created through building climate resilience.”

“We are grateful that the Paris Agreement has put Climate Adaptation on a par with mitigation but there is a long way to go. Understanding Climate Adaptation is crucial if we want to put paper into practice.”
Christiaan Wallet, Operations Director of GCECA

The announcement was made today in Bonn at the COP23 climate conference which this year is focussing on the implementation of the 2015 Paris Agreement on climate change. The EBRD is organising four panels on key climate issues and Bank representatives are also taking part in many more events.

The EBRD is a major investor in climate finance in many of the 38 emerging economies where it works, a driving force in energy efficiency projects, a pioneer in the development of renewable energy sources and an increasingly important player in adaptation to climate change, having signed almost 180 climate resilience investment since 2011. Under its Green Economy Transition (GET) approach, the EBRD aims to dedicate 40 per cent of its annual investment to green finance by 2020 and is well on the way to achieving this objective.

The Global Centre of Excellence on Climate Adaptation helps countries, institutions and businesses to adapt to a warming climate, which is increasing the frequency of natural disasters and causing economic disruptions. It is bringing together international partners, including leading knowledge institutes, businesses, NGOs, local and national governments, international organisations and financial institutions. A technical secretariat has been created and funded by the EBRD.”

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Contact CEO Emilie Mazzacurati for more information and read about Four Twenty Seven’s solutions to help financial institutions, businesses and governments improve their climate resilience.

Delaware’s Climate-Ready Workforce Pilot Project

Changing climate conditions threaten the health and safety of the State of Delaware’s most important assets: its workforce. Building on momentum at the state level to assess climate risks and implement relevant adaptation actions, Four Twenty Seven worked with five state agencies to identify and protect at-risk workers from the impacts of extreme events such as storms, floods, and high temperatures. Based on an evaluation of existing policies, key informant interviews, and surveys, Four Twenty Seven provided recommendations to more explicitly incorporate climate considerations, share agency good practices, and strengthen the fundamentals of current policies and procedures by improving processes for policy development, implementation, and enforcement. The findings from this project will be used to inform state agencies’ consideration of next steps with regard to health, safety and climate change.

Download the summary report

View the Delaware Climate-Ready Workforce Presentation

 

USAID Climate Change Adaptation, Thought Leadership and Assessment Project

The US Agency for International Development (USAID) calls for consideration of climate risks in its regional and country strategies as well as its sector programs and projects. To support this effort, Four Twenty Seven reviewed existing vulnerability assessment approaches and developed a typology and framework of approaches. The framework helps USAID staff navigate existing vulnerability assessment methods (including considerations related to data, timeframes, required expertise, and outputs) in order to support the design of fit-for-purpose vulnerability assessments to enable the development of climate-resilient in-country investments.

USAID Climate Integration Support Facility

USAID, Integra, Abt

The United States Agency for International Development (USAID) has designed a new mechanism to support the resiliency of its programming. The Climate Integration Support Facility (CISF) is a multi-award, Blanket Purchase Agreement with an overall ceiling price of $49.9 million, providing technical and advisory services to USAID Bureaus and Missions to integrate mandated climate risk considerations into strategies, projects, and activities around the globe. Four Twenty Seven is a partner on the consortiums led by Integra and Abt to provide climate risk assessments that will help inform adaptation decision-making within USAID programs.

Download the CISF overview

Market Analysis of Adaptation and Resilience Investment Opportunities

Four Twenty Seven led a comprehensive market analysis and feasibility study for a multilateral development bank to help catalyze and mobilize private capital investment in adaptation and resilience. The study included:

  • Current investments in adaptation and resilience from public and private investors;
  • An assessment of vulnerability, readiness and adaptation potential by region and by country;
  • An analysis of commercial viable adaptation interventions and technologies that ca be scaled or replicated, by sector;
  • Identification of barriers and bottlenecks to private sector investment in adaptation & resilience
  • Development of solutions to overcome barriers, create an enabling environment, and mobilize flows of capital into adaptation investment, in particular for infrastructure and SME resilience

Obama Commits to Building Resilience – From the Ground Up

President Obama announced on July 16 new federal resources, grants and tools specifically intended to help local communities prepare for climate impacts. Citing direct threats to US infrastructure outlined by the White House Task Force on Climate Preparedness and Resilience, the series of actions will help Native American Tribes, rural communities and cities across the US assess vulnerabilities, deal with current impacts such as drought and develop strategies and plans to increase resilience in the future. The funding will also support development of three-dimensional mapping of the US to improve our ability to mitigate floods and erosion.

This unprecedented support for resilience building provides valuable opportunities to pilot new strategies and technologies as well as to share best practices across state lines. Adaptation strategies must be informed by local conditions and site-specific data in order to be successfully implemented – one of the reasons this new federal funding is so critical.

Wednesday’s meeting marked the last of the 26-person White House Task Force on Climate Preparedness and Resilience, which will submit their final recommendations to the President this fall. The task force is made up of mayors, governors, county and Tribal officials.

Focused Funding from Multiple Sources

This week’s announcement follows the Administration’s June launch of a $1 billion investment fund for climate resilience. Any state, city or tribe that experienced a federally declared major disaster in 2011, 2012 or 2013 – approximately 200 of which hit the US over that three year period – is eligible to compete for the resilience funds. New details for the competition outline two distinct phases over the year-long competition beginning with risk assessment and planning, followed by design and implementation. Not all communities who are awarded funding for the first phase will continue to receive support for implementation efforts. Instead, phase two funding will be limited to those proposals that show the most potential for success and replicability across the US – a big incentive to inspire creative proposals that seek to partner across sectors.

Other new funding announced this week includes $10 million for Federal-Tribal Climate Resilience Partnership and Technical Assistance Program focused on preparation through the delivery of adaptation training to Tribes nationwide. Rural communities that are already struggling with drought, especially in the West Coast, will also receive additional funding to improve current coping mechanisms. The Obama administration also committed an additional $236.3 million to rural communities in eight states to support efforts to improve rural electric infrastructure to both increase economic competitiveness in these areas and build resilience – a huge boon for energy assurance planning which is key to successful adaptation. Additionally, $1.5 million of competitive funding will be available to states and Tribes to improve coastal management programs by taking climate impacts into account.

New Tools, Guidance and Pilot Projects

USGS Lidar MapObama’s pledge of new funding is coupled with strategic investment in innovative mapping data and tools, new guidance for Hazard Mitigation Planning and the launch of two preparedness pilot projects in the City of Houston and the State of Colorado.

The 3-D Elevation Program Partnership will advance 3-dimensional mapping data of the US through collaboration between the public, private and academic sectors as well as local communities. These data and tools will be designed to enhance a community’s ability to predict and respond to floods, coastal erosion and storm surge impacts and to improve water resource planning and identification of landslide hazards – all essential aspects of adaptation planning and local resilience. New, more sophisticated 3-D maps will also help state governments comply with new guidance from FEMA requiring consideration of climate variability within State Hazard Mitigation Plans.

Key Federal agencies including NASA, the Energy Department, Department of Defense, Department of the Interior, Department of Agriculture and the U.S. Army Corps of Engineers will all play a role in the “Preparedness Pilots” to be launched in both the State of Colorado and the City of Houston. The goal of the pilots are to enable each community to assess and prepare for region-specific climate vulnerabilities and interdependencies as a way to demonstrate new strategies and programs and provide models for other areas nationwide. These cross-agency partnerships will also help to shed light communication gaps and needs between the agencies to improve their ability to continue partnering going forward.

Ahead of the Curve in the Golden State

The President’s suite of tools and resources will undoubtedly enhance regional and national capacity to assess and plan for climate vulnerabilities. In California, home of the nation’s only multi-sector carbon cap and trade program, state leaders are already starting to step up to this challenge by assessing governance structures and needs for climate impacts above and beyond greenhouse gas mitigation.

LittleHoovercommission report coverIn “Governing California Through Climate Change” a recent report released by the State’s Little Hoover Commission, the author’s outline current weaknesses and gaps within California’s governance infrastructure as it relates to adaptation planning and implementation of resilience building strategies. The Commission ultimately asks the State to take on the same role and responsibilities in climate adaptation and risk assessment that it has for managing the state’s greenhouse gas emissions – a big ask but one that has been anticipated by many at both the state and local levels.

The report was informed in part by three public hearings held by the Commission beginning last August 2013 where local and state officials, private sector representatives and adaptation experts shared their experience in local resilience building efforts as well as their recommendations regarding the role of the state.

These varied testimonies pointed to the alarming fact that there is currently no clear, state-level authority or structure to develop statewide adaptation policy. The lack of a consistent and authoritative source of data and climate information at the state level was also cited as a major concern. This lack of data coordination and consensus is coupled with a state governance structure that, by nature, isolates accountability for specific climate impacts in different departments, agencies and budgets.

Because there are numerous state agencies whose jurisdictions touch on aspects of resilience building – such as the Coastal Commission – responsibility to address the multiple risks posed by climate impacts is at best, widely distributed among agencies and, at worst siloed within inflexible bureaucracies of state government.

Key report recommendations include:

  • Establish a new state entity, or enhance the capacity of an existing entity, to establish and share the best-available state science and risk assessment procedures for anticipated climate impacts.
  • Expand the focus of the California Strategic Growth Council to fund non-conflicting adaptation and mitigation efforts in cities, counties and regions.

Looking Ahead – Who’s on Board?

Like the President’s nationwide commitment to resilience, the Commission’s report acknowledges the importance and necessity of local knowledge and data to inform a successful statewide adaptation strategy. Climate change will affect each of California’s cities, counties and regions based on location specific vulnerabilities – therefore, any statewide strategy, according to the Commission, must be informed by local risk assessments.

The President’s announcements and new, targeted funding sources are a direct response to inaction from the Congress on critical climate issues – as such, enthusiastic opposition from Republican leaders is anticipated. Similarly, in California, efforts to streamline and accelerate vulnerability assessments and adaptation planning will likely be met with resistance from some local communities fearful of potential regulatory and budget implications at both the state and local level.

However this unprecedented support for resilience building provides valuable opportunities to pilot new strategies and technologies as well as to share best practices across state lines. Both of these efforts also highlight the importance of engaging the private sector to enhance the development of new tools and strategies and to better understand our local economic vulnerabilities. Unlike greenhouse gas mitigation, adaptation strategies must be informed by local conditions and site-specific data in order to be successfully implemented – one of the reasons this new federal funding is so critical.

Ultimately, states, communities and private sector companies that have invested in understanding their specific climate risks and vulnerabilities will be well positioned to capitalize on these new opportunities. Climate impacts are already affecting communities nationwide – these changes present huge challenges and require immediate response to avoid catastrophic impacts. This new federal level support presents multiple opportunities to not only increase climate and economic resilience, but to better understand how we can work across sectors and communities to capitalize on the opportunities that our changing climate presents. It’s clear that anyone not yet ready to take a realistic look at their own climate risk will miss out on many near term opportunities and, ultimately, end up suffering much larger economic and social costs in the long term.

By Aleka Seville

Images courtesy of USGS and Little Hoover Commission.