By Steve Wilson
Steven R. Wilson manages projects related to climate change adaptation and resilience for the Multilateral Investment Fund. He recently co-created PROADAPT, a $12 million facility that helps build climate resilience in the private sector in Latin America and the Caribbean.
Toward a Private Framing of Climate Resilience
How does the private sector anticipate and build climate resilience in the face of increasing risks, such as cyclonic winds, flooding and storm surge, drought, heat waves, sea level rise and wildfires? Answering this question depends very much on whom you ask. In public policy circles, private actors are often characterized as relatively unconcerned about the threat of climate change, more focused on short-term financial results, and discounting climate risk as an issue in the distant future.
Many in the private sector would disagree, noting that while "short-termism" remains a challenge, many firms recognize and frame climate risks from a defensive, risk management perspective and take practical steps to protect business operations and continuity, supply chains, and property. Even so, businesses find it very difficult to calculate the returns on resilience investments due to the uncertainty over when climate-related risks will emerge and how bad their effects will be.
Now, a growing number of analysts view one organization's climate risk as another's opportunity, as reflected by the demand for private "climate resilience solutions," or products and services that protect buyers from a range of climate risks. These include resilient building materials and services, new weather and climate analytics, climate-resistant seeds, crops, and methods, financial and insurance products that incentivize resilience building, water-efficient technologies, flood control and site drainage, efficient air conditioning services, back-up power generation systems, insulation against heat, and many other products and services. These solutions are not usually described using climate jargon, but are a major opportunity for large and small firms across the globe.
The Common Challenge and Uncommon Opportunity of Climate Resilience
This opportunistic framing inspired a recent conference, The Challenge and the Opportunity of Private Sector Climate Resilience , held in Cartagena, Colombia May 25-27 2016. This event, hosted by the Multilateral Investment Fund of the Inter-American Development Bank Group, highlighted the Proadapt Program, an initiative in partnership with the Nordic Development Fund.
Over 200 people attended this conference, and another 3,000 from 21 countries accessed the live stream. Participants from many different sectors came to this event to focus on climate resilience as a major and growing private sector opportunity.
Several key takeaways emerged from this two and a half day event:
- Compared with climate mitigation (mostly clean/renewable energy and energy efficiency), climate adaptation and resilience have been understudied and underfunded - particularly in the private sector.
- The public sector is critical to resilience building, but the private sector has a huge role to play, producing goods and services that offer resilience solutions, and innovating in climate-resilient technologies and processes.
- Several factors hamper private action on resilience, including uncertainty over the location, timing, and magnitude of climate risks, a lack of common metrics and definitions, difficulty in using scientific climate data for business and investment decisions, and a continuing lack of awareness.
- Despite these challenges, a growing number of private actors now view climate risk as more than just a threat, but as a strategic business opportunity.
Here is just a sampling of the areas where emerging resilience opportunities were identified:
New water products and services
Climate variability and drought are driving the demand for water efficient solutions, such as new types of metering, analytics, wastewater treatment, loss reduction, recycling, and desalinization, among others.
Climate change threatens agricultural productivity in tropical countries and could lead to food shortages. More efficient drip irrigation is needed, and the use of new analytics and micro-technologies in "precision agriculture," drought-resilient seeds, storage and logistics, and tailored insurance to improve farmer resilience in developing countries.
Financial, insurance and investment methodologies and products
Debt instruments, such as green/climate bonds, could support investments in resilience. Credit rating agencies now recognize climate change as a material risk, a fact that will incentivize climate resilience considerations in private decision-making. Catastrophe bonds have been successfully deployed as risk transfer instruments, and new types of climate risk insurance vehicles and risk assessment schemes are entering the market. Further, there is early and growing interest among venture capital and private equity investors in companies that produce climate-resilient products.
Public-private partnerships for resilient infrastructure
Public-private partnerships are increasingly common in water, transportation, telecommunications and energy infrastructure. The demand for greater resilience in PPPs drives the demand for new metrics, stress tests, climate resilience materials, risk sharing, flood maps, etc., needed to assure investors that climate resilience is addressed in PPP designs.
Increased climate change risk disclosure
With increasing climate variability the pressure for increased climate risk disclosure will mount, generating opportunities for firms that specialize in reporting and disclosure activities. Currently, few companies, investors, or lenders disclose their climate risks with adequate rigor. The International Finance Corporation's Equator Principles state that climate risks should be included in environmental impact assessments, but the consensus at this event was that these are of a cursory nature.
Resilience in Energy
Clean and renewable energy sources, such as wind and solar installations, both contribute to mitigation and are part of climate resilience. These installations and more conventional energy sources need resilient measures, particularly along coasts and in flood zones. Resilience also means adequate back-up power generation, distribution, micro-grids, storage, and disaster recovery.
Climate change drives the expansion of vector-borne diseases and other public health threats. This will create greater demand for new vaccines, pharmaceutical products, protection against mosquitoes and other pests, among other responses. In addition, extreme weather events will require increasing the resilience of health care facilities around the world. Many hospitals, for example, have little or no air conditioning.
This summary is far from exhaustive; interested readers can find the full conference agenda, presentations, and videos of the panels at the Proadapt event site.
Investors at the event urged that development banks, such as the Inter-American Development Bank, continue to co-finance pilot resilience projects and to develop new financial products and tools for climate resilience. These institutions can take the lead in incorporating climate risks into lending, particularly in agriculture.
This conference will be followed by Proadapt workshops in the next year on investment opportunities in climate analytics, business opportunities in water efficient products and technologies, and strategic issues in investing in climate resilience, among other areas.
From the Multilateral Investment Fund Trends blog