Financing Projects that Address the Physical Risks from Climate Change

Climate Adaptation, Adaptation Finance, Data, Insurance, Investor Relations

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.”

October 4, 2016