Room with a View? Costing Environmental Risks

Light reflecting, a pastel palette sea, graceful contours of the coast. These seaside pleasures we seek in our dreams, can see in our mind's eye, and now and then can afford when we buy or rent real estate. Hotels call these landscape pleasures "premium" and charge us handsomely for premium room attributes, even though the environment itself offers its pleasures to us free of cost. Proximity to the sea and sea views have been advantages for trade, art and culture since the beginning of human settlements -- a poetry in the landscape of where we choose to locate ourselves, and conduct commerce. And owners of land near the sea are skillful at translating the free value attached to seafront property by nature into charges they can pass along. After all, who among us checks into an hotel and asks for a room facing a wall?

But, via climate change, we are nastily converting free pleasures into pending threats. Tsunamis from earthquakes are notorious, of course, but earthquakes are for the most part not human-caused. Climate change, on the other hand, derives from human activities and is underway, warming the planet here, cooling it there, but everywhere causing unpredictable and extreme weather patterns.

Wild storm surges are, unfortunately, becoming a new normal, placing new demands on the insurance industry and other financial entities that have to come to terms with how to compensate and cope with ensuing damage costs -- current and projected. For what if 1 in 100 year catastrophic weather events start to occur more often? Are those costs bearable financially and operationally, let alone spiritually?

On the operational side, institutions globally have had to put on a new pair of glasses to clearly see and address new potential risks. In the U.S. perhaps the most dramatic recent example is the new Whitney Museum of Art, the country's premier museum of American Art, which just moved its collection to lower Manhattan, right next to the Hudson River and a few ferry toots from its opening to the Atlantic Ocean. The Museum opening was a monumental civic affair, by Renzo Piano, and became a global architectural sensation overnight. From outside, the museum looks like a sleek steel city building that fell asleep and woke up as a ship taking to a narrow strip of water. From nearly every gallery, the Hudson River glistens, reflecting so much sunlight at times that huge scrim curtains needed to be hung to cut the glare and avoid possible light damage to the art.

But what about flooding? In 2012, during infamous Hurricane Sandy, whose storm surge broke all records, lower Manhattan was underwater and blacked out, including where the Whitney now stands. Storm water made the nearby subway tunnels unusable, and rubber dinghies for a time replaced yellow cabs as a way to move around. And, frighteningly, the basement of the new Whitney site, then under construction, was itself flooded with about 15 meters of water.

So, planning had to begin again, and the new Whitney design had to prepare for the worst--not just to save the building of course, but to protect the priceless art inside--the core mission and raison d'être of the Museum after all. The result is a fortress against the tempest, with an enormous flood door and heavy mobile walls that are in storage until the day they may be needed, said to be able to be erected quickly. This is as close to sealing up the museum like a submarine as is possible with today's technology. In fact, the company that helped with the design is Walz and Krenzer, with the tagline, "Watertight closures for the Marine Industry since 1939."

To fund the Museum, $125 million in revenue bonds were issued by the Trust for Cultural Resources of the City of New York and recently rated "A" by Fitch's. Interestingly, the ratings criteria on financial viability of the Museum did not apparently include any plus or minus that would reflect the museum's storm preparedness, though presumably the extra resiliency planning should make the Museum more viable and insurable, and thus more likely to deliver on its revenue projections in that business interruption in the event of a major storm should be lessened.

But no one really knows. The storm system, while state of the art, remains to be tested although no one would like to see it tested in real life. Could it be that a world class museum has been built in a flood plain?

Urban resiliency and hardening of coastal locations is a hot topic worldwide today, in view of climate change, especially in Asia where memories of coastal wipe-outs are all too recent and vivid, even more especially in Hong Kong, with its superb miles of river walks, concert halls, hotels and museums along Victoria Harbor. Still, the financial services sector is perhaps playing catch-up to weather facts.

In the meantime, globally, the "1 in 100 initiative" is underway, an effort convened by partners such as the UN Office of Disaster Risk Reduction, Standard and Poor's, and the Willis Group, a global risk advisor and insurance and reinsurance broker. Currently, the "1 in 100 year" stress test gauges disaster risk and evaluates the "maximum probable financial loss" an entity could expect to face in a hundred years, i.e., a one percent chance that disaster would occur in the next 12 months. A "1 in a 100" event is generally an insolvency risk and indeed a ruined art collection would be the equivalent to insolvency. The "1 in a 100" stress testing framework is used by the insurance industry, and the new initiative aims to integrate similar standards into the financial services sector and banking and securities regulation. In other words, to fortify financial assets in the same way as physical assets.

Who knows if we can keep financial and physical assets safe in the face of the environmental dangers. But certainly we must act in the face of a bitter irony: that the climate change we have unleashed is so nefarious it is saddling timeless free pleasures, such as proximity to the sea, with costs and risks not conceived even a mere decade ago.