Innovative financial mechanisms bringing together the public and private sectors are needed to address a shortfall in investment in climate adaptation.
The highly anticipated COP21 climate negotiations in December 2015 focused the minds of the international community on the threat of climate change, the investment required in mitigation, the role of the private sector and the importance of ever more diligent carbon reduction measures to limit increases in global temperature to manageable levels.
It is undeniable that in the period since the industrial revolution, global temperatures have risen materially, by around 1oC on average. This has triggered entirely predictable climate events whose impacts have hit our infrastructure, causing global losses in excess of £100bn per year. Further ‘locked in’ temperature rises due to historic and ongoing carbon emissions will see the asset base hit by increasingly frequent and severe climate impacts, and these losses will inexorably rise.
Currently, the recognised losses are largely the result of ‘one-off’ major climatic events impacting on the ‘hard’ infrastructure that supports the developed world. However future losses will be increasingly influenced by exacerbating issues such as population growth, economic and environmental migration and urbanisation impacting on the developing world, exposing the vulnerabilities of ‘social’ infrastructure.
The increasing severity and frequency of acute (short term) weather events as well as worsening chronic (long term) climate impacts such as sea level and temperature rises will expose these vulnerabilities. The effects will not be restricted to the developing world, but will also be experienced in the advanced economies where service systems are becoming ever-more complex, integrated and inter-reliant. Running in parallel will be huge investment in global infrastructure to serve all these population trends as well as a constant expectation of a better quality of life. Extrapolating this forward a couple of decades and current trends indicate that losses due to climate impacts will reach a global cost of US$1trn a year.
The case for investment in climate resilience – defined as adapting our infrastructure and services to withstand climate impacts – is clear, and is becoming increasingly urgent. We estimate that within 20 to 30 years we will need to spend US$200bn globally each year to ensure these losses do not rise to unaffordable levels.
There is a clear cost benefit to some of this investment; investing in the resilience of vulnerable and critical assets will show a bottom-line return, and it can be estimated that about one-third of the required investment will fall into that category, perhaps mitigating up to 50% of the losses. However, there is a gap between investment in the resilience of hard infrastructure where asset funders, owners and managers will see a direct return, and funding the resilience of social, traditionally public sector-financed infrastructure such as coastal defences and rural road networks.
The monetised returns for the latter are less obvious, while the need is more fundamental.
We estimate this global annual shortfall could be as much as US$130bn. As climate impacts increase, this funding gap will widen as assets become stranded, damaged or destroyed by major weather events; cascade failures will spread to related services; and businesses will be lost altogether.
To unlock the additional funding we need to develop innovative financing mechanisms, for example with the public sector top slicing the risk to private capital or guaranteeing private investment in extremis. The social benefits of climate resilience need to be translated into more standard investment products. And committed public sector funding – such as the US$100bn capitalisation of the Green Climate Fund – must be used to mobilise and leverage private sector investment.
Asset owners and financiers are already beginning to invest to protect hard infrastructure. The UK aid budget alongside worldwide development agencies will fund a proportion of the resilience of soft infrastructure. But the shortfall can’t be solved by the private or public sectors working individually. The remainder needs to be filled by mobilising institutional investors to stimulate private sector capital that is actively looking for investment opportunities but is risk sensitive. Public and private sectors must work together to devise and implement financial mechanisms to stimulate this investment.
The high profile of the COP21 negotiations brought much needed attention to these globally important issues. The challenge is for the private and public sectors to harness this momentum to create viable solutions.
This article first appeared in the December 2015 issue of the ENDS report.