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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Spotlighting innovations in urban sustainability and connected technology
Featuring Roger Behrens
Meeting of the Minds talked with Roger Behrens about planning for hybrid urban transportation systems that include both formal and informal transit services. Roger is an Associate Professor in the University of Cape Town’s Department of Civil Engineering. He is Director of the Centre for Transport Studies, and of the African Centre of Excellence for Studies in Public and Non-motorised Transport (ACET). He graduated with a Master Degree in City and Regional Planning from UCT in 1991, and with a PhD degree in 2002. His current research activities relate to: the integration and improvement of paratransit services; the dynamics and pace of changing travel behavior; the use of transport systems by pedestrians; and the urban form prerequisites for viable public transport networks.
As two officials of a distressed public agency facing down the consequences of a long history of underinvestment, we are acutely sensitive to the need to get things done on a budget. We are also technologists, which brings us to the idea and potential of digital placemaking for mobility infrastructure: the repurposing of web, mobile and other software and hardware tools to bring new value to the places around the physical nodes and artifacts of the transit system.
Digital tools are often limited to a public engagement role in placemaking. We believe that they can play an important role in transit agency efforts to make its physical infrastructure work better for people.
Infrastructure is a place where climate action, business interests, and political will have the potential to intersect. Infrastructure investment tends to be a bipartisan, business-friendly policy, in large part because the need is so great. The American Society of Civil Engineers estimates that the United States will need to spend $3.6 trillion between 2010 and 2020 to simply maintain our current transportation, water, and energy infrastructure. Yet there is an estimated funding shortfall of $1.6 trillion, or approximately 45% of the total requirement. In the American Society of Civil Engineers’ Infrastructure Report card, most infrastructure categories received a D+, with only one category, solid waste infrastructure, receiving a B- or higher.
Unlocking the tech sector’s potential in Chicago (and beyond) means confronting segregation and inequality.
The tech field suffers from a costly cycle of inequity. The U.S. Equal Employment Opportunity Commission found that, compared to other private industries, high-tech companies hire a disproportionate number of white people and men—68.5% and 64% of employees, respectively. Meanwhile, the STEM workforce in the U.S. is projected to grow exponentially; already, in job-rich Cook County and DuPage counties, tech jobs grew 14% and 18% between 2009 and mid-2014, according to the U.S. Bureau of Labor Statistics. As the city’s tech sector grows, so might inequality—unless more leaders like Sales-Griffin step up with creative interventions. Today in Chicago, just 12% of Latinos and 20% of African-Americans have bachelor’s degrees, compared to 44% of whites. The diversity talent gap threatens the tech sector’s vitality.
As cities grapple with urban growth and climate change placing more people and economic activity in harm’s way, the resilience of critical infrastructures, and of the assets that make up these infrastructures, is coming increasingly under the spotlight. However, this is a complex issue, and not all its dimensions are well understood. This article attempts to explore them.
Cities can be thought of as “systems of systems”, where energy, water, communications, transportation, healthcare, law and order, data, and other physical systems (not to mention social, political and economic systems) interact. From this perspective, many issues arise.
Some countries and cities can identify their critical systems and assets (it is, for example, a Federal requirement for cities to do this in the US), but very few can identify how they are linked to each other. As a result, they have no way to identify and manage the associated inter-dependencies. In many cases, as with the grid failure example, the existence of these linkages may not even be fully understood by all the entities affected, and accordingly come as a highly unwelcome surprise. Achieving critical infrastructure resilience therefore requires investing time and effort to identify and maintain relevant and up-to-date data on these linkages.
The Los Angeles River is now center stage in discussions of open space and recreation, active transportation, regional watershed management, ecosystem restoration, climate resilience, and public art transforming the LA region. The river winds through 51 miles of industrial lots, open space areas, and residential neighborhoods. In the most populous U.S. County, the LA River has potential to serve millions of people.
Communities around the world are accelerating their response to the current wave of digital innovations and they have good reason to. Digitalization can be considered a critical ingredient in the recipe of our sustainable communities of today and tomorrow – in the broadest sense of the word – economically, socially and environmentally. Digitalization carries the means and the organizational paradigm to not just do things slightly more efficiently, but differently and better. The design shift it affords can help us collectively tackle some of the greatest challenges humanity has ever faced, such as climate change, the need for sustainable and affordable energy, fair and sufficient levels of water and food distribution, and education and healthcare for all in a world where the population continues to grow. And of course, it should help us arrive at solutions and services that will allow burgeoning cities to thrive.
Green buildings support the goals of sustainable communities and vice versa. When office, apartment and retail properties are built and managed sustainably, the surrounding neighborhood benefits. Likewise, a community that enables a sustainable, live-work-play lifestyle enhances the long-term relevancy of green buildings within its borders.
These communities often promote job growth by creating environments for start-ups to thrive. In addition, companies in many business sectors are locating offices in sustainable urban neighborhoods in order to attract the college-educated millennials who live there. As they grow, companies lease office space in buildings they believe will help them attract talented employees—and sustainability is an important part of that appeal.
In 2014, the United Nations Department of Economic and Social Affairs announced that the majority of humans were residing in urban environments for the first time in recorded history. As the world’s population centers become more densely urbanized, average temperatures in these areas are on the rise. The Urban Heat Island (UHI) effect can be felt on any typical hot and sunny day in cities like Los Angeles or Washington, D.C. In the middle of the city, concrete highways and structures absorb UV rays from the sun and radiate heat into the surrounding area. If you were to venture outside of these cities to less densely populated rural areas, you may find temperatures up to 27℉ lower.
This vast increase in temperature isn’t only an issue while the sun is out. Nighttime temperatures in urban areas have been found to be as much as 22℉ higher than air temperatures in neighboring, less developed areas. The UHI effect is exacerbated by removing green spaces, which leads to an increase in greenhouse gas emissions and air pollution levels. Removing green spaces puts a strain on other critical urban infrastructure such as the energy grid, water quality and public health systems. Redeveloping underutilized land, such as vacant lots or former industrial and commercial sites, presents excellent opportunities to rethink UHI mitigating factors such as the urban tree canopy, green roofs, and other issues related to site design and building materials. Land recycling presents an opportunity to design from the ground up in anticipation of the our changing climate and the demands it will place on all of us.
The recent explosion of technology integration with the transportation industry has rapidly disrupted traditional transportation legacy planning methodologies. The number of options and the traveler information available to the everyday citizen has created a new dynamic in which anyone can call a car or request product delivery at the touch of a button. Cities across the nation are developing new smart city initiatives to integrate open data with new transportation systems so that people can move more freely in their communities. New public transportation systems are being thought of as critical foundational systems to the smart city initiatives that will get people out of their cars and into reduced carbon footprint transportation systems. Soon, artificial intelligence will be operating the nation’s transportation systems at maximum efficiency, and with reduced operating costs compared to the use of human capital.
However, as technological innovation continues to progress at light speed, the country’s underserved communities are continually left behind. With the United States projected to be a majority minority country by the year 2044, governmental policy and resources must be adjusted to meet the demands of our rapidly changing demographics.
As the leader of a transportation agency, there is no shortage of people ready to tell me how technology is going to revolutionize the way we do business. Autonomous vehicles, on-demand sensors, drone-based package delivery, solar-powered roads, road-straddling super-buses (that one turned out to a bust); it’s a veritable cornucopia of real and not-so-real revolutions. And within that world of technophiles, there’s a subset waiting to tell me (and you) about how wireless communications will underlie and enable all of those revolutions to our transportation systems. As with so many things in life, they’re totally right, and yet it’s so much more complicated.
The current hype about autonomous vehicle is accompanied by a surge of interest from shared mobility operators. Ridesharing providers such as Uber, Lyft and Didi are investing heavily into AV technology. Earlier this year, Uber announced its partnership with Daimler to bring self-driving technology to the market. Didi has opened up an artificial intelligence lab in Mountain View, the backyard of many autonomous vehicle competitors. Lyft’s collaboration with GM is well known and this month they announced an investment from Jaguar Landrover to bring autonomous connected vehicles on the road.
The buzz clearly indicates that the autonomous revolution is imminent. The engineering communities are excited about solving some of the technological challenges, which will ensure data sharing and interoperatability. Governments and cities are trying to grasp the implications of AVs on the road and provide the right regulatory frameworks. Amidst all of this excitement, we shouldn’t forget the impacts this revolution will have on people and that we will have to solve some real operational challenges.