Stranded Assets: Preventing the Next Era of Climate Change

I first heard the term “stranded assets” at a Bloomberg event in New York City during Climate Week 2014.  For me, the term conjured up images of homeowners and their dogs waiting atop roofs to be rescued during Hurricane Katrina.  Yet that didn’t seem right for the context of the discussion, and a quick Google search set me straight: They were talking about coal-fired power plants that would be worth nada on Wall Street should a carbon tax change the market.  (That was almost two years before Peabody Coal went bankrupt.)

Two years later at Climate Week NYC 2016’s Sustainable Investment Forum, stranded assets still seems to mean the same thing to investors – coal – and they mull it increasingly. The industry understands the term as holdings that need to be written down before the end of their expected life span. 

But BlackRock is an early leader in unveiling it's future meaning. Read more here at my oped published in Triple Pundit:

http://www.triplepundit.com/2016/10/stranded-assets-preventing-next-era-climate-change/

Financing Projects that Address the Physical Risks from Climate Change

I asked the Intentional Endowment Forum, run by a former boss of mine Dr. Tony Cortese, if they were aware of adaptation finance, that is, finance that addresses the physical risks of climate change.

I thought the response from Dr. Maximilian Horster a Partner at south pole group focused on the financial industry was particularly succinct, recapping what those of us in the adaptation finance investigation space are discovering. 

He writes:

“Currently, the investor focus is indeed mostly on transition risk: legislation, regulation, behavioral change, carbon pricing etc and the subsequent effects of asset stranding potential, energy transition and the like. Keep in mind that also here, we only see the beginning of actual stress tests among a – still small – group of investors and for only a few asset classes. Although the uptake is increasing rapidly, we are far from having established consistent standards, benchmarks or best practices.

For physical risks, we are even further away from an investor understanding. Often, data availability on physical climate risk is cited as the big hurdle but that is only half the story: Data on the likelihood of climate related extreme weather events (flooding, droughts etc) exist for most geographies and is used by insurance companies to price liabilities. However, it is not yet utilized for asset management, not even by that very same insurance firms that produce this data.  

What is missing is a mapping of these physical risks to the actual assets (such as production facilities), but also supply chain locations and end markets. We are developing this right now, but interestingly, investor interest is much less than one would think. Main reason is that - according to climate science - the full swing of physical risks are still 15-20 years away and therefore beyond most investors’ investment horizon (“tragedy of the horizons”).

Because of this, we see very few investments into climate change adaptation by mainstream investors. The exceptions are of course the multi-lateral funds under the UNFCCC and other outfits that have a strong focus on climate change adaptation, mainly for rural population and agriculture in developing countries since some time:http://www.climatefundsupdate.org/themes/adaptation.”

Laurels for Credit Rating Agencies:Levers of Change in the Climate Adaptation Market

The voices and actions of the financial industry are critical to change capital market policy and practice change. That’s why I’m thrilled credit rating agencies are seizing their role as levers of change in the adaptation market. Consider these three examples of their newfound interest:

1. Standard & Poor’s explicitly weighs adaptation in its new Proposed Green Bond evaluation tool.

2. S&P proposes an Environmental Social and Governance risk exposure assessment.

3. In its proposed ESG assessment tool, S&P acknowledges the differences in the time horizon of risk. 

Read my oped published in Triple Pundit for more insights: http://www.triplepundit.com/2016/10/laurels-credit-raters-levers-change-climate-adaptation-market/

Financing Adaptation: The White House and The Global Adaptation & Resilience Work Group Exchange Ideas

At a White House roundtable on resilience investment with the Global Adaptation and Resilience work group and the Council on Environmental Quality last month, experts from government and the financial sector debated what the financial products are that will help people plan for the long term.

An optimistic bunch, there was general consensus that incentives are lining up – climate adaptation is smart business.

But do finance and policy advisors have the information they need to make decisions in the long-term interests of their shareholders and the public?

Three key questions emerged from the conversation, along with several sub issues: 

First, are there maps of climate risk to analyze, adaptation tools that resolve climate risk, and a known set of adaptation projects to use as best practice and to seed the resilience investment pipeline? Several insurance leaders noted that there are existing vectors of risk that the industry uses that are helpful for pricing climate risk. 

At the same time, part of making the environment for investment stable is having a clear awareness of the measure of progress the investment will cause. An initial step is to “weatherize data” showing what the impact of weather is on parts of the economy.  With these short term impacts explained, then it is important to build measurement models to extrapolate into the future.  The customization of predictive risk data is the next frontier in adaptation investments. 

These tools will be most useful when delivered along with narratives about best practice.  Several finance-industry adaptation project examples were shared, including a Nature Conservancy project that is allowing the Government of the Seychelles to swap some of its debt for climate adaptation projects and a Swiss Re project offering small holder crop insurance against drought and floods in Ethiopia.

Second, should the investment industry be focused just on increasing resilient investments – that is investments focused on adaptation projects – or should they also care about increasing the resilience of projects, that is the multi-trillion dollars of investments funded globally?  The focus of these investment leaders was generally on the latter.

Especially since insurance experts use a back-of-the-envelope calculation that basic productivity for a business needs to be restored within 2 weeks (as long as a typical business can stay afloat with no revenue) and full productivity in three months (which is tied to a timeline of when insurance pays for unrecoverable losses), it seems the resilience of all projects is imperative for the markets.  Understanding the local context of the physical changes caused by climate change for market sectors is complex, and private sector leaders are focused not just on the physical risks from climate changes, but also the social risks to their workforce and markets. These human factors are often related not just to the company, but also the communities within which they do business.  Thus, resilience is today’s problem of the commons. Of course, another major insurance issue is that only about 30% of extreme risk loss is insured around the world. 

Third, what is the roles for the US Government in increasing the finance industry’s engagement with resilience?  While it was acknowledged that resilience is generally a shareholder issue, (vs. national security which is a government issue), and the private sector owns and operate a significant majority of infrastructure in the world, it was agreed there is a significant role for government. For instance, participants recommended that climate science risk be baked into codes and standards to motivate the private sector, since the general rule of thumb is that one dollar spent in risk mitigation saves four dollars in the future on recovery.

But the major issue is that the US government is the insurer of last resort, based on the Stafford Act, allowing developers to operate with the knowledge that if you invest now without paying any premium for future risk mitigation, the federal government (in the form of FEMA, the Federal Emergency Management Agency) will ultimately pay for damages incurred that are beyond the capacity of the private insurance market. Repealing the Stafford Act would transform the industry’s viewpoint on climate risk. 

Another recommendation for the government was to promulgate and enforce disclosure requirements for both acute and chronic types of risks.  Tax incentives or rebates could help ensure compliance with a Securities and Exchange Commission asset level climate risk disclosure.  Ultimately, the group agreed that the private sector takes on risks that it wants to take on, designing, building and repairing – all crucial to resilience.  But the private sector is not going to choose to invest in  what they cannot control - regulatory change. 

This is a crucial role for the US Government. Finance leaders will always innovate to get the most out of the market, and policy leaders can help make sure these decisions are in the long-term interests of the public with regulatory innovation.

UNISDR Launches RISE Initiative for Disaster Risk-Sensitive INVESTMENT

“Economic losses from disasters are out of control and can only be reduced in partnership with the private sector.” ̶ United Nations Secretary-General Ban Ki Moon

The United Nation’s Office for Disaster Risk Reduction, or UNISDR, and PwC, the global professional services network, launched their ambitious R!SE Initiative in the United States early this month in Boston, seeking to embed disaster risk management into investment decisions.

R!SE reflects a new way of collaborating on a global scale to unlock the potential for public and private sector entities to take leadership on disaster risk reduction. The one-day event on March 2 focused on whether cities should be transparent and share their resilience gaps. That’s also the key question for ND-GAIN as we embark on our Urban Adaptation Assessment with the Kresge Foundation.

The R!SE agenda at its launch encompassed a wide band of issues to define and discuss what R!SE seeks to do and why it matters:

• A session defined the initiative, its different activity streams and projects already underway.
• One explained why preparedness is important to the U.S. government and how the Federal Emergency Management Agency’s new strategy supports this approach. (In short, the FEMA strategy involves an expeditionary organization that is survivor-centric and enables disaster risk reduction nationally.)
• Another highlighted public-private partnerships that already promote resilience across the country. It examined the long-term governance structure needed to increase resilience across cities, states and the nation and the correct balance necessary to engage with the public and private sectors.
• Afternoon breakout sessions explored two-to-three specific questions centering on how to leverage R!SE across the nation to enhance disaster-sensitive investments and to enhance society’s resilience.

Here are five key takeaways:

1. Transparency is critical, but it’s not always easy from a political perspective to communicate gaps in resilience.
2. Increasing trust throughout the communication process – by measuring such issues as economic impact that matter to citizens – proves necessary to demonstrate to citizens and communities that resilience investment will benefit them and help cities win battles over other priorities.
3. A shift has occurred over the past few years toward increasing transparency, perhaps reflecting the rise in the number of activities to actually help increase resilience, not just assess it. The aim: Base every decision on an understanding of resilience.
4. Since “city leader” isn’t synonymous with government, arming corporate and nonprofit leaders with information to help them develop capacity to increase resilience allows governments to be more transparent about gaps that exist with their constituents.
5. A key asset of the R!SE Initiative is the Disaster Resilience Scorecard for Cities, created by AECOM, the professional and technical services firm for infrastructure, and IBM for UNISDR. San Francisco has used the scorecard to inform capital asset decisions, which suggests that in the name of transparency, scorecard results should be made available to the public.

Oh, and given the similarities with R!SE, please watch this space as ND-GAIN transitions to a focus on urban adaptation issues in 2015.

Ranking Country Sustainability for Investor Decisions

As we know, decision–makers rarely if ever look at climate risk in isolation, which is why I’m glad that Marc Klugmann brought another great article from Fast Company’s Ben Shiller to my attention.  Mark is a founding strategic advisor to GAIN, and thus he is on the lookout for other indices that rank country vulnerability. RobecoSAM offers us a good one and a reminder of the importance of looking at a chromatic list of indicators when making sustainability decisions.

The article,The 59 Countries That Are Most Prepared To Handle An Uncertain Future is particularly interesting to us at ND-Global Adaptation Index, where we are currently pouring over 2012 data in preparation for launching the 2013 index in December. Comparing their index to ND-GAIN’s 2011 data we see that there is a great deal of consistency.  For instance eight out of ND-GAIN’s top-ten are in their top ten (The difference ND-GAIN includes New Zealand and Ireland in our top ten, not Canada and US).

ND-GAIN – which includes measures of governance, economics and society along with health, infrastructure,water, etc. and RobecoSAM’s sustainability data are complimentary and help corporations, governments, and charitable organizations prioritize investments in:

• New Markets, Products & Services
• Targeted Development
• Risk Mitigation
• Corporate Social Responsibility

Ultimately, indices like these help address crucial investor questions, such as:

1. Are you solving a big problem, preferably one that is worth a lot of money and is recognized today?
2. Is your solution differentiated, compelling and sustainable?
3. Does your venture have an understandable and relevant business model given your solution and the problem it addresses?

Stay tuned for a blog post next week that digs into some of these questions from the perspective of adaptation risk.

Institutional investor vs. individual investor – who is the climate adaptation actor?

Calvert Investments, CERES and Oxfam have just released a splendid guide for companies and investors dealing with disclosure and management of climate impacts entitled “Physical Risks from Climate Change.” I had the pleasure of speaking recently on a panel with Matthew Alsted, Calvert’s vice president of Channel Marketing and Brand Strategy at the LOHAS Forum 2012. He noted that, 50 years ago, individual households owned an estimated two-thirds to three- quarters of publicly traded stocks (U.S.) whereas institutional investors held the balance. Today that ratio has flipped.  This shift is remarkable and reminds me how much we must rely on the good minds at places such as Fidelity and Vanguard (I invest in both mutual fund houses) to encourage corporations to make good climate adaptation decisions.

The guide includes sets of key questions for different sectors that should be required reading for fund managers. They, in particular, should study them since passing along risk decisions to companies isn’t sufficient anymore, in my opinion.  I believe mutual fund investors have an important role in magnifying the opportunities and minimizing the risks of climate change.  As they have with corporate-governance issues, such as favoring the splitting of the chairman and CEO roles, perhaps financial houses could serve as part of the market solution to climate change by expecting responsible climate-risk avoidance.

Why are investors important?  Because from their questioning and probing, they help make climate adaptation material to companies.  The CERES/Calvert/Oxfam report makes clear that information related to long-term climate risks aren’t mandatory disclosures since these long-term risks aren’t deemed material to investors interested in the short term.  Regrettably, as the Colorado fires illustrate, the increase in adverse climate impacts will have a material effect on companies’ assets and operations.

ISC Corporate Services  “Disclosing Climate Risks: How 100 Companies are Responding to New SEC Guidelines” indicates that investors concerned about physical climate risk have actively pursued disclosure from the companies in which they invest and are using tools that track and evaluate companies’ climate-risk disclosures.

That’s encouraging!  I’ll be looking for ways to help more companies do the same.

Ten Point Checklist for Making Corporations Resilient

The United Nations International Strategy for Disaster Reduction has published an interesting guide:  Making Cities Resilient:  My City is Getting Ready. Its ten-point checklist for making cities resilient begs for a companion list.  I’ve added my two cents by developing a “Ten Point Checklist for Making Corporations Resilient.” http://www.unisdr.org/english/campaigns/campaign2010-2015/documents/campaign-kit.pdf

Ten-Point Checklist
	For Making Cities Resilient (UNISDR)	For Making Corporations Resilient
1	Put in place organization and coordination to understand and reduce disaster risk, based on participation of citizen groups and civil society. Build local alliances. Ensure that all departments understand their role regarding disaster risk reduction and preparedness.	Include climate adaptation in a member of the C-suite’s job description. Establish a cross-function climate adaptation working group and connections with local and regional governments in key geographies in your enterprise – especially operations and supply chain.  Consider collaborating with key members of your supply chain, industry peers and neighboring businesses on climate adaptation planning and execution. Ensure that all departments understand their role regarding disaster risk reduction and preparedness.
2	Assign a budget for disaster risk reduction and provide incentives for homeowners, low-income families, communities, businesses and the public sector to invest inreducing the risks they face.	Include budget lines for both proactive adaptation measures and recoup from extreme event.  Include climate adaptation in performance reviews for the C-suite, lieutenants and managers.
3	Maintain up-to-date data on hazards and vulnerabilities; prepare risk assessments; and use these as the basis for urban development plans and decisions. Ensure that this information and the plans for your city’s resilience are readily available to the public and fully discussed with them.	Include climate adaptation in your emergency preparedness and continuity plans initially, with annual updates.  Ensure that this information and the plans for your corporation’s resilience are readily available to your leadership team and fully discussed with them.
4	Invest in and maintain critical infrastructure that reduces risk, such as flooddrainage, adjusted where needed to cope with climate change.	Invest in and maintain critical infrastructure that reduces risk, such as flood drainage, snow removal, vector-borne disease prevention, and heat mitigation for workers and machinery, adjusted where needed to cope with climate change. Consider supply chain and building decisions with these risks in mind.
5	Assess the safety of all schools and health facilities and upgrade these asnecessary.	Assess the safety of all facilities, especially those in locations vulnerable to extreme weather events (coastal, arid) and upgrade or move.
6	Apply and enforce realistic, risk-compliant building regulations and land-use planning principles. Identify safe land for low-income citizens and develop upgrading of informal settlements, wherever feasible.	Engage with local governments to ensure that climate adaptation regulations protect residents and economic growth. Identify your most vulnerable employees (age, income, tasks, geography) and plan especially for their safety.
7	Ensure education programs and training on disaster risk reduction are in place in schools and local communities.	Ensure education programs and training on disaster risk reduction are in place throughout your enterprise, not just for disaster preparedness, but also for heat exhaustion, vector-borne disease, and the like.
8	Protect ecosystems and natural buffers to mitigate floods, storm surges and other hazards to which your city may be vulnerable. Adapt to climate change by building on effective risk-reduction practices.	Protect and enhance ecosystems and natural buffers in and near your holdings to mitigate floods, storm surges, extreme heat and other hazards.
9	Install early warning systems and emergency management capacities in your city and hold regular public preparedness drills.	Install early-warning systems and emergency-management capacities in your enterprise and hold regular preparedness drills.
10	After any disaster, ensure that the needs of survivors are placed at the center of reconstruction with support from them and their community organizations to design and help implement responses, including rebuilding homes and livelihoods.	After any disaster, ensure the needs of survivors are placed at the center of reconstruction.  See http://climateadaptationexchange.com/crisis-communications-are-you-ready-for-a-climate-related-crisis-in-your-business/ for communications guidelines.

Are You Vulnerable to a Climate Change Lawsuit?

Are You Vulnerable to a Climate Change Lawsuit?

This post comes from guest blogger Harlan Loeb harlan.loeb@edelman.com, Edelman's Executive Vice President & Director of U.S. Crisis & Issues Management Practice.

The flood waters receded along the mighty Mississippi. Now look for a possible surge of climate change-related lawsuits to follow. Tort cases brought against companies by stakeholders who claim the companies knew a risk of a major flood risk existed and should have done much more before the deluge to mitigate the damaging effects to business continuity, employee safety and operational stability.

Ever since Hurricane Andrew struck Florida and Louisiana in August 1992, and Hurricane Katrina pummeled the Gulf Coast 13 years later, a roster of climate change lawsuits have evolved.  Right now, three climate tort cases are wending their way through the U.S. legal system. In one of the cases, Connecticut vs. American Electric Power, the U.S. Supreme Court is expected to issue a ruling by the end of June. 1

The climate change issue is controversial. No agreement exists, to be sure, that global warming is triggering the extreme weather systems that just this year have triggered monstrous tornadoes, torrential rains, record-breaking snowfalls and even months-long droughts. Still, trending data and other signs point to our planet growing warmer as carbon dioxide and other pollutants damage its fragile ecosystem.

Whatever is affecting climate change, however, corporate leaders today can’t look backward any longer to historical records. Companies are now expected to be able to anticipate risks that appear to be happening more frequently and more intensely.  In other words, companies facing such lawsuits aren’t simply measured on whether they had adequate insurance, financial reserves or cash on hand.  Stakeholders will nail them if they knew a risk existed but failed to do the qualitative, values-based analysis that now shapes the corporate character of a company.

Some companies such as Chiquita Brands International and Entergy have been working actively to consider ways to decrease their impacts on climate change.  Chiquita Brands has led through efforts to conserve water and promote biodiversity. It has joined in the Costa Rican National Climate Change Strategy and participates actively in two environmental working groups dealing with climate change and air quality. For a decade, Entergy, the global energy company, has addressed climate change; since 2001, it has decreased carbon dioxide emissions more than 16 percent below its reduction-campaign goal for the period.

What can companies do in light of this emerging new class of climate-change litigation?  Here are some suggestions:

· Ensure you have a climate-action plan in place, or develop one if you don’t, and it should focus on capabilities rather than function.

· Make sure your board of directors is very involved in the climate change issue; it should consider naming a sustainability or social-purpose expert as a director or an advisor; someone who can wed together the organization’s social responsibility, its operating stability and the qualitative risks it has considered.

· Don’t worry solely about risks, but determine what opportunities could develop from putting a climate-action plan in place.

As climate change litigation is developing, force majeure is not the force to be reckoned with any longer. Rather, it has much more to do with the affirmative decisions made before a climate-related event occurs

1. The cases are Connecticut vs. American Electric Power, Kivalina vs. ExxonMobil Corporation, and Comer vs. Murphy Oil.