With climate change threatening revenue, profitability and growth, it’s time to get serious about investing in resilience, argues Ian Allison, head of climate resilience at Mott MacDonald.
There is a worldwide, exponential upward trend in disruption and losses resulting from extreme weather, affecting ever more people, ever more severely.
On the global scale the ‘beast from the east’ cold snap that hit the UK in February 2018 was minor, but productivity losses cost the economy an estimated £1bn a day.
In 2017, Hurricane Harvey displaced 30,000 people across Texas and the Gulf of Mexico. Losses are estimated at US$160bn. Harvey was only one of 16 ‘billion dollar plus’ hurricanes in 2017, for which economic losses total US$300bn.
In Asia, the 2017 cyclone season was no less severe. Infrastructure density is not as great as in the southern US, so the economic losses weren’t as eye-popping. But the human tragedy was far greater. And let’s be clear: Models and predictions confirm there is much worse to come.
Climate change is making global weather patterns more volatile, with increasingly severe and frequent extreme events, and causing sea level rise. Meanwhile, twin drivers of population growth and social development are adding new infrastructure to the asset base at a staggering rate. Globally, the need for investment in new infrastructure is estimated at US$6trn a year over the coming decades.
If left unchecked, our forecasts estimate that global losses will rise rapidly towards US$1trn per year, not only because of increasingly severe climate impacts, but because there is ever more infrastructure at risk.
Who's paying for it?
If they think about resilience at all, organisations still do so in silos, which is a barrier to achieving full resilience. Because the benefits of investing are disaggregated and, in part, intangible, organisations reasonably ask: ‘What’s the return on my investment?’ Answers lie largely in economic self-interest.
The economies of Asia Pacific and East Asia have been growing strongly – more than 6% in 2017. The Organisation for Economomic Co-operation & Development (OECD) sees no let-up in growth to 2023 and beyond. The Asian Development Bank (ADB) estimates that US$22.5trn worth of infrastructure is needed over the next 15 years in the region to service ‘business as usual’ economic and social development.
But the resiliency of that infrastructure is critically important to the effectiveness of the investment. Here’s why. Infrastructure has to provide both a defined quality of service and value for money.
To do so it depends on:
Society: Society creates demand and pays for services. It provides the workforce on which infrastructure owners and operators, and their suppliers, rely. If society is disrupted, the effects rapidly manifest in lost revenue and reduced workforce availability. Infrastructure may be as reliant for continuity on the competence and integrity within its ‘customer-side’ networks as within its own asset and supplier base.
Money: Business success hinges on the ability to obtain investment, loans and insurance. Losing access to capital makes it impossible to create new assets, enhance existing assets, or carry out essential repair and maintenance, which jeopardises the ability to respond to increasing demand, improve quality, or build resilience against potential disruption. Losing insurance cover makes it impossible to attract capital.
Policy: Infrastructure is created and managed within a policy environment shaped by legislation, regulation, standards and governance. Compliance is key to gaining a ‘license to operate’. But policy can be slow to adapt, and often lags behind social, economic and environmental agendas.
Asset system and supply chain: An asset system consists of the many discrete pieces of physical infrastructure and their component parts that collectively a business depends on. A supply chain is made up of the individual organisations that provide services, equipment and materials. The integrity and competence of these networks are essential to operational continuity, service provision, revenue and capital recirculation. There are layers of complexity and dependency, with each link in both networks having its own sub-systems and sub-chains.
Surviving climate impacts
Each of these four interdependencies is crucial to the performance of infrastructure. Yet, as in any system or process, the strength or resilience of the whole is only as great as the weakest and most vulnerable component.
A business is finely balanced between the service it provides, the policy framework that regulates and governs it, and money – access to investment, finance, funding and insurance. But the organisation’s stability is determined by factors relating to service provision.
Providing any product or service involves the management of uncertainties and risks, offset by revenue and return. Asset system and supply chain integrity are the building blocks enabling a business to effectively reduce uncertainty, mitigate those risks, and deliver that return.
When an asset system is put under stress – for example from rapid population growth and social development – quality of service can suffer, resulting in loss of revenue and reputational damage. Legislation and regulatory compliance is also likely to be compromised.
Equilibrium can be restored by more investment in the asset and systems. But investors and insurers may not extend additional financing or cover. If they do, they may impose harsher terms, or impose terms that make finance unaffordable. Often, the business or infrastructure is left stressed or degraded.
In these circumstances, the impacts resulting from climate change can add catastrophic additional pressure.
Stress is imposed by the long-term chronic effects of climate change: higher average temperatures can affect infrastructure, plants and animals, workers and customers; rising sea-level elevates risk from erosion, coastal flooding, saline intrusion into aquifers, and groundwater flooding.
Severe weather events can apply an intense shock load to already stressed and vulnerable systems, resulting in more extensive damage, service interruption and sometimes total failure.