Private sector begins to invest in climate adaptation


“WI GO to make a lot of money, ”says Ken LaRoe, CEO of Florida’s Climate First Bank. This may sound like an improper boast from a traditional banker who sells conventional loans. But the lender aims to realize its profits by funding green refrigeration, building renovations and other investments designed to help borrowers adapt to climate change. “Storm hardening is becoming a very big thing in Florida,” said LaRoe, “which will be a great loan opportunity for us.”

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The need for such expenditure is clear. the UN The Environment Agenda estimates that annual adaptation costs in poor countries alone are expected to rise from around $ 70 billion today to $ 140 billion to $ 300 billion in 2030, and double by 2050 in nominal terms. It seems likely that private investors will need to become more involved. According to the Climate Policy Initiative, an expert body, they contributed 2% of global adaptation spending in 2018. Apathy reflected, among other things, a lack of reliable data on climate risks and the perception that adaptation offers low returns. But the mood could change, as Mr. LaRoe’s enthusiasm suggests.

There is reason to believe that investing in climate adaptation can be very profitable, if only because not making such investments can be costly for businesses. A 2019 study by BlackRock, an asset manager, argued that real estate will be particularly affected by the impacts of climate change. Beyond the immediate damage from storms and floods, he highlighted more expensive or reduced insurance coverage, more expensive energy, costs of installing back-up generators and other emergency systems, and a fall in property prices in vulnerable areas.

In hurricane-prone Florida, a study of insurance data found that new buildings with stricter building codes suffered much less damage, generating $ 3.50 in profit for every dollar in additional compliance costs. A recent report of the Global Commission on Adaptation (GCA), a NGO notables, including Bill Gates, have identified $ 1.8 billion in investments that could generate net profits of $ 7.1 billion by 2030.

So it makes sense that reinsurers are also hitting the drum. Swiss Re believes that it is much cheaper to invest before a climate catastrophe occurs than to pay to fix it after the fact. Boffins from Munich Re co-authored a recent article showing that linking adaptation and insurance, for example by restoring coral reefs that reduce damage from subsequent storms, could lead to lower premiums and a return on upfront costs. by six over 25 years.

Net investment in climate adaptation could turn into torrent as companies are forced to disclose climate risks. the EU is moving towards mandatory disclosure. In America, President Joe Biden issued an executive order to the same effect in May, and the Securities and Exchange Commission is expected to unveil a related proposal soon.

Investors are paying more attention. “If you are not protected against climate risk, you are likely to experience lower financial returns in the future,” says Vivek Pathak of the International Finance Corporation, the private arm of the World Bank. Natalie Ambrosio Preudhomme of Four Twenty Seven, a consultancy firm, highlights the emergence of resilience bonds, the proceeds of which must go to climate adaptation, as something that fits with “the investment strategies of many large investors. institutional ”. A 2019 issue from the European Bank for Reconstruction and Development was oversubscribed.

Resilience-focused investment funds are also emerging. Sanjay Wagle, co-founder of Lightsmith Group, a private equity firm, invests money in technologies such as geospatial imagery, weather analysis and precision agriculture. On July 19, Generate capital, a American sustainable infrastructure company, said it had raised $ 2 billion. Scott Jacobs, his boss, insists that “we do not accept lower returns for investments with resilience benefits”. He mentions his company’s sustainable electrical “micro-grids” in Texas and California, which have kept the power going and continued to generate income during recent blackouts caused by frost and wildfires.

Utilities can be the most concerned about the resilience of all. Mr Wagle pits Pacific Gas & Electric, a Northern California utility bankrupted largely because of its inability to prepare for wildfires and weather shocks, with Southern California Edison, his flourishing southern counterpart who spends over $ 1 billion a year on resilience. The BlackRock report analyzed the climate exposure of 269 U.S. utilities and found that the most resilient of them trade at a premium. “We believe that this premium could increase … as the risks worsen and investors pay more attention to the dangers,” he concluded. Skeptics of the adaptation should note that its lead author was Brian Deese, now one of Mr. Biden’s primary advisers. â– 

Correction (July 22, 2021): An earlier version of this story described Generate Capital as a private equity fund. It is in fact a sustainable infrastructure company. Sorry.

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This article appeared in the Finance & economics section of the print edition under the title “Overlooked no more”


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