Time to take climate resilience financing seriously

The human and economic losses due to climate change will continue to grow unless we build resilience, says Ian Allison.

Ian Allison, Mott MacDonald

World diplomats at the COP 21 negotiations have signed up to a landmark deal to cut carbon emissions and keep global temperatures within 2oC of pre-industrial levels.

However, average global temperatures have already risen by 1oC, a change which is triggering increasingly frequent and severe climate and weather impacts. Even with the most ambitious climate deal, historic and ‘locked-in’ carbon emissions will see average temperatures rise further, exacerbating the effects on the climate and increasing the losses to our asset base.

While negotiations took place in Paris, events at the beginning of December brought home the seriousness of worsening climate change: 

On 1 December, the Indian State of Tamil Nadu received 374mm of rain in 24 hours. This was the most severe rainfall in 100 years and compounded the effects of the 1218mm of rain that fell in November, itself three times the average, causing widespread flooding and associated destruction across the city of Chennai.

Meanwhile, north west England experienced a similar intensity rainfall event of 350mm in 24 hours, resulting in the recently built flood defences of Carlisle, designed against a 250 year return period event, being over-topped, again causing widespread disruption and damage.

There is no comparison in the scale of the tragedy: Chennai is a dense urban area of some 5M people and suffered at least 270 fatalities with fears the final death toll could be much higher. Carlisle is a town with a population of 100,000 and at the time of writing there has been one directly attributable fatality. Carlisle has seen greater proportional economic losses, with disruption, reconstruction and insurance claims for losses likely to reach £250M-£300M, despite the recent investment. However, in a catchment with such rapid hydrological response, the £32M investment in Carlisle’s flood defences was key to minimising the human tragedy.

It is difficult to prove that either event was a direct result of climate change, but these increasingly severe and frequent weather events are entirely in line with modelled predictions of the effects of our changing climate. The University of Oxford and Royal Netherlands Met Office have calculated climate change has increased the chance of such record rains by 40%.

Financing climate resilience

The differences in the scale and impacts of the floods in Chennai and Carlisle is fairly typical of major climate impacts; in the developed world the effects are felt mostly on infrastructure with potentially huge economic losses, while in the developing world the density of the population and the lack of more extensive infrastructure often means there is a severe human cost to extreme weather events.

Encourage innovative public-private financing: There is private capital available to build resilience and this needs to be mobilised through innovative public-private finance mechanisms. For example, the public sector can top slice the risk to private capital, retaining some elements of policy and revenue risks, or can guarantee private investment in extremis. The social benefits of climate resilience need to be translated into standard investment products to encourage investment. And committed public sector funding – such as the US$100bn Green Climate Fund – must be used to leverage private sector monies.

Consider resilience at the funding stage: Development funds and insurers are increasingly considering the climate resilience of assets in their investment decisions. As this trend becomes more normal, clients will have to prove the resilience of new developments, particularly if that investment is to be ‘supported’ by robust insurance. Those in the infrastructure industry should take the lead by advising clients of the importance of asset resilience now.

Encourage integrated resilience strategies: Investment funds and insurers are increasingly taking into account adjacent assets and supporting systems due to the risk of cascade failures following a climate impact. Climate resilience strategies must cover whole service systems rather than assets in isolation.

Develop insurance strategies: Investment is often tied to the availability of insurance, and in many parts of the world, insurers still need to develop the models and instruments needed to understand and underwrite climate risks – the insurance sector has a pivotal role to play in encouraging resilience investment.

Investors have historically preferred climate mitigation projects, which attract subsidies or favourable financial terms and are more readily understood, and more readily translated in terms of investment and return. The benefits of climate adaptation are more subtle and can even be invisible – the absence of problems following a climate impact. As such, more needs to be done to quantify the value of climate resilience and to persuade clients – especially in parts of the world where the risk is greatest – of the importance of resilience investment. We need to develop credible evaluation tools to highlight the value of investment in resilience where traditional cost-benefit analyses fail.

The extreme flooding we have seen in both the UK and India are just the latest in a long line of extreme weather events that have caused an estimated fourfold increase in annual economic losses over the last 35 years. The need for investment in climate adaptation is urgent.

Ian Allison is global head, Climate Resilience, Mott MacDonald 

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