Insight - Climate adaptation should be a public good, not an asset class

Coping with more heatwaves, floods, and natural disasters will be expensive. The United Nations Environment Programme (UNEP) says developing countries alone will need to spend up to US$300bil (RM1.23 trillion) a year by the end of the decade. (A man cycles through flood water as the River Thames floods at high tide on a Springtide in London, Britain, April 28, 2021. - Reuters)

IN THE run-up to the 2020 United States election, a meme started making the rounds on Twitter. “Transport is climate policy, ” someone would tweet above an article about subway improvement. “Childcare is climate policy, ” they’d say about a paid maternity leave proposal. The quip applied to almost everything – even voting by mail.

The idea was that it all leads back to global warming and how we’re preparing for its effects. Early economic models assumed only outdoor-oriented sectors such as agriculture and tourism would be badly affected. We now know that many facets of society will suffer as the atmosphere warms. Poorer countries will generally be hit the hardest. Richer economies will see inequality widen.

Coping with more heatwaves, floods, and natural disasters will be expensive. The United Nations Environment Programme (UNEP) says developing countries alone will need to spend up to US$300bil (RM1.23 trillion) a year by the end of the decade.

One way to raise the funds is to tap financial markets. Someone’s cost could become another person’s opportunity. With the appetite for sustainable investing growing rapidly, surely the only challenge is coming up with a way to link investors to projects?

We like to think that once there’s a template for an adaptation bond or other instrument that can be easily replicated and packaged into portfolios, shifting the money to where it’s most needed will be easy.

The reality, as always, is different.

A few years ago I worked on a project that tried to develop a climate adaptation finance mechanism. We brought together representatives from insurance, banking, pension funds, state and local governments, and academia. The group learned a lot, but came up empty-handed in terms of a working framework.

Most of the dedicated adaptation finance mechanisms we identified (and there were very few) were either very small or very specific. A special District of Columbia Water and Sewer Authority debt instrument in the US distributed the risks and benefits of an untested method for flood management. An insurance fund helped a Mexican reef collect fees from coastal tourism businesses to help restore corals after hurricanes hit. There were few common elements. Each instrument was an elaborate and bespoke arrangement rather than a formulaic deal that could be multiplied and easily traded with low transaction costs.

That’s because of the nature of the underlying “asset.” Sure, in theory, you could securitise the construction of a seawall and capture returns via fees from wealthy coastal dwellers or local councils. But seawalls are not widgets. Each has to be uniquely designed for a specific location and its conditions. There are few economies of scale.

There’s also no established norm about how the costs of climate adaptation projects should be shared among those who are being protected. Will enough residents willingly pay for our theoretical seawall, either directly or via their taxes? Who’s being protected, and at whose expense? Structures that protect one stretch of beach can often create problems further along the coastline.

Adaptation doesn’t fall into a neat category. It can mean investing in infrastructure or designing programmes to protect nature. It can involve constructing big sea walls, but it can also be about retaining trees on city streets, or ensuring access to clean drinking water. Right now these measures are too small to interest big pension funds and asset managers. A report by UNEP and others found only about two dozen projects larger than US$25mil (RM102mil) over the last few years.

And there are lots of other worthy causes competing for the same pool of sustainable investing cash. Protecting against climate change early seems like a no-brainer. It will avoid far greater costs down the line. Investors want returns that are commensurate with the risk, relative to other opportunities. ─ Bloomberg

Kate Mackenzie writes the Stranded Assets column for Bloomberg Green. She advises organisations working to limit climate change to the Paris Agreement goals. The views expressed here are her own.

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