The Next Era of Market Finance for Resilience
Walking through my Midwestern neighborhood, I spy innovations that suggest we are up to the challenges that a changing climate triggers. I see storm sewers with “rain blockers” that delay rainwaters’ approach to them during and after big rains; “permeable alleys” that absorb water through pores in their concrete; and bioswales of plants and spongy soil that absorb water runoff from roofs and roads. And underground a mile or so away, deep tunnels take precipitation from heavy rains and snow melts to large distant reservoirs to prevent overflows of sewage and storm water.
It’s a cornucopia of innovation with the city as a lab. And it’s paid for with an equally creative mix of funds, from consent decree-induced storm water rate increases; legal settlements after utility failures; federal and agency grants and incentives; and philanthropic partnerships with nonprofit community organizations.
What will it cost?
As we enter an era of demands on cities sparked by climate change–induced shocks and stresses, ingenuity by cities is in high demand. Various estimates of adaptation/resiliency funding needs exist. For instance, the United Nations Development Program projects that adaptation costs could range from $140 billion to $300 billion by 2030 – and between $280 billion and $500 billion by 2050 (source). In the U.S., the Union of Concerned Scientists, a source for cost estimates to remedy such risks, estimates that sea-level rises of 13-to-20 inches by 2100 would threaten privately insured coastal property valued at $4.7 trillion (source).
In addition, the Risky Business initiative notes that increases in temperature, heat waves and humidity will drive up demand for energy and require the equivalent of 200 new power plants nationwide that could cost up to $12 billion a year by 2100 (source). Plus, we already know how costly it can be to respond to climate change. Hurricane Sandy in 2012 cost New York $32 billion in damage and loss. Earlier, thunderstorms, tornadoes and flooding in the summer of 2008 caused more than $18 billion in damage and 55 deaths nationwide, primarily in the Midwest.
Communities need funds to shore up their critical infrastructure assets, such as transportation infrastructure, wastewater treatment, telecommunications networks and electricity and gas supply. Funds are required for projects where resilience is a primary function to enhance a particular geography (e.g., a new sea wall) and to boost traditional mainstream projects’ resiliency attributes (e.g., elevating an existing bridge). Both primary function and resilience projects can bring big paybacks. Global reinsurer Zurich calculates that for every dollar spent on targeted flood-risk reduction measures, five dollars can be saved by avoiding and reducing losses.
Where will cities find the funding stream to support inventive resilience-related projects that strengthen the capacity of governments, communities, institutions and businesses to survive, adapt, and grow in the face of increased climate-driven shocks and stresses? Based both on my role in the Global Adaptation and Resilience Investment work group and on dozens of conversations with resiliency fund leaders, resilience initiatives, hazard mitigation experts and regional collaborations (primarily in support of the Regional Plan Association’s Regional Resilience project for the Fourth Regional Plan entitled “Establishing a Regional Resilience Trust Fund”), here are three elements to a fresh era of market finance.
In many communities, those most at risk from climate impacts are poor or disenfranchised residents. Their greater risk can reflect such factors as lower insurance penetration, fewer savings, language-barriers, fewer funds to dedicate to maintenance, more unemployment, less access to information and more assets in lower-lying areas. When planners focus on improving infrastructure and social structures in more vulnerable communities, projects reap collateral benefits, known as “resilience dividends.” In these situations, a future disruption doesn’t become a disaster and shorter-term economic and social benefits are realized. The key lies in setting priorities for proposals that decrease economic vulnerability along with climate vulnerability.
For practitioners, three practical ways build these collateral benefits into projects:
- Include government officials, project developers and citizens in project planning to create engagement and literal and figurative buy-in.
- Promote breaking traditional departmental silos to identify funding that can be used collaboratively.
- Emphasize system benefits over project benefits to promote projects that have positive impacts across both the targeted and surrounding communities.
Benefit Cost Analysis
Many city leaders already have a long-term mindset. They plan for their city’s wellbeing 20, 30 and 50 years into the future. But they need to develop it in their financiers by modeling long-term benefits and costs through assessments that go beyond a normal benefit cost analysis and include elements of equity, land use, safety and stability. Typically, basic project BCAs evaluate direct financial benefits (e.g., project revenues or decreased operational costs) and direct byproducts (e.g., labor days, taxes from business transaction revenue, etc.) Resilience-oriented BCAs also calculate impacts that are avoided in the future as well as current benefits, such as outdoor community amenities, job creation for project maintenance, changes in property values, changes in public health, value of land-based amenities and positive and negative impacts on lower income or minority populations.
Several models for long-term benefit cost analysis are emerging:
- The International Financial Stability Board’s Task Force on Climate Related Financial Disclosures is finalizing a yearlong process to, among other things, create measures of climate risk.
- Standard and Poor’s system for “Evaluating the Environmental Impact of Projects Aimed at Adapting to Climate Change.”
- The National Disaster Resilience Competition, Department of Housing and Urban Development. (While this BCA is considered a good practice because it focuses on finance loss and return in terms of both future risks and future benefits and is a U.S. government source, its discount rate is likely too short for most projects because it doesn’t reflect the useful project life of 50-100 years).
Lessons from developing-country adaptation finance:
The largest sources of approved funding for adaptation projects globally are currently the Pilot Program for Climate Resilience (PPCR) of the World Bank’s Climate Investment Funds (CIF), the Least Developed Countries Fund (LDCF) administered by the Global Environmental Facility (GEF), the Special Climate Change Fund (SCCF) and the Adaptation Fund (AF). New funds are being established, including the $353 million Adaptation for Smallholder Agriculture Program (ASAP) under the International Fund for Agricultural Development (IFAD). The largest adaptation fund is expected to be the Green Climate Fund (GCF) at $1 billion/year by 2020, which will split its funding equally between mitigation and adaptation projects, with initial allocations starting in 2016.
There are existing market-finance groups. For instance, the P8 Group consists of 12 of the world’s leading pension funds collectively managing $3 trillion. P8’s aim is to create viable investment vehicles to simultaneously combat climate change and promote sustainable growth in developing countries. New entrants to the developing world adaptation finance marketplace include the Rockefeller Foundation/Asian Development Bank Urban Climate Change Resilience Partnership.
Just as development finance options do in emerging economies, in the US, in collaborations with market investors, cities can structure deals where they take the first loss position, with the mid debt taken up by a patient capital (such as pensions) and the senior debt by institutional investors.
Potential Sources of Finance
Both collaboration and long term BCAs should not only entice the finance community, they should make it more politically feasible to ensure that existing budgets and funds – such as general obligation bonds and rate-payer revenue – can be used for resilience projects. While cities often are wary of increasing their general obligation bonds, credit raters are rational actors and more of them are mindful of resilience. Simply consider Standard &Poor’s recent reports on the impact of climate risk on sovereigns and corporations. In any case, these features should make financing with any mechanism easier.
Here are some other funding mechanisms to consider:
- Community Reinvestment Act (CRA) investments: Banks have shifted away from meeting their CRA goals with their general market share in low-value mortgages in the post-housing bust. The statute is flexible enough to allow investments for resilience that improve communities.
- EPA Supplemental Environmental Projects (SEP): Organizations (more than 600 across the country) such as utilities that are fined for violating various environmental statutes should finance resiliency solutions process across the states and territories.
- EPA Clean Water State Revolving Fund (CWSRF) and Drinking Water State Revolving Fund (DWSRF): for local and regional infrastructure agencies.
- FEMA Hazard Mitigation Grant Program (HMGP): Funds for projects that mitigate future hazards after a president declares a disaster area can receive such monies.
- FEMA Disaster Deductible Program (DDP): A funding model under consideration by FEMA to promote risk-informed decision-making to build resilience and reduce the costs of future events. (N.B. open for public review until April, 2017)
- Green Banks: With tools such as green bonds and property assessed clean energy (PACE) programs, Green Banks are well placed to pivot to adaptation if their legislated authority enables the change.
- Green Bonds: Already funding resilience, Climate Bond Initiative (CBI) and others are working to introduce adaptation/resiliency components of all Green Bonds, and Standard & Poor’s has established a green bond rating system that includes resilience elements.
- HUD Section 108 Loan Guarantees: HUD’S existing borrowing authority.
- HUD Community Development Block Grants (CDBG): Relatively flexible funding for community improvement that has a recent history of focus on resilience.
- Patient Capital: Investors with longer-term perspectives, such as pension funds, where the expectation of market return enjoys a longer timeframe.
- Philanthropy including existing funders Kresge Foundation and Rockefeller Foundation, and Climate Resilience Fund (CRF).
- Property Assessed Clean Energy (PACE): With reforms, it could become a Property Assessed Resiliency (PAR) program where debt and assets transferred with the property.
- Public-Private Partnerships (PPPs): PPP projects require long-term commitment and appropriate allocation of risk and, thus, are a fit for some adaptation projects.
- Social Impact Bonds: Investors with longer-term market returns who make payments when targeted social outcomes are achieved.
- Special Climate Change Fund (SCCF): Designed to finance and execute activities, programs and measures that relate to climate change in generally higher income countries.
- Taxes and Fees: Local governments can establish special resilience districts that assess taxes or fees. The California Earthquake Authority (CEA) is one model.
In today’s political climate, how can we pull this off? It is key to brand your resilience projects with a positive message (and offering solutions to a catastrophe). Your resilience projects promote safety, security and stability, and you can illuminate how they improve well-being of people, communities and property. Resilient infrastructure serves as a foundation less likely to crumble, flood, catch fire, be inundated, buckle or otherwise fail from the extremes of climate change. Herein lies a future that markets will depend on.
 In the most basic definitions, “adaptation” is when an entity evolves to address changing conditions, while “resiliency” is the ability to bounce back and become stronger in response to changes.
 Union of Concerned Scientists, Climate Change in the US, the Prohibitive Costs of Inaction The Star-Ledger New Jersey On-Line: “Cuomo: Sandy Cost NY, NYC $32b in Damage and Loss”
 Special Thanks to Nick Shufro with JulZach Resilience for collaborating to compile these resources.
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