When it comes to infrastructure, one of the biggest challenges is pricing physical climate risk into investment decisions. It’s a global issue and a real systemic failure of markets around the world. Physical climate risk is often mispriced and there’s also a lack of transparency and understanding around climate-related impacts.
Yet investors, lenders and insurers and ratings agencies all need this vital information if they are to make informed financial decisions. Investing in climate resilience may cost a little extra upfront, but it will deliver more sustainable infrastructure in the long-term.
For example, if investment for a new bridge in a monsoon-prone region of India is more robust, is positioned and engineered with climate change in mind and is built as a low-carbon structure, it is more likely to survive and thrive into the next century. Informed decisions like these need to be made. Unfortunately, one major challenge we face is the lack of tools and analytics that allow us to quantify the capital investments needed to make these decisions.
This is why Willis Towers Watson has spearheaded the new Coalition for Climate Resilient Investment. Launched at the UN Climate Action Summit on 23 September, the Coalition represents 34 companies and organizations with more than US$5 trillion in assets, including support from the World Economic Forum and the UK and Jamaica governments.
This Coalition is the first of its kind private sector-led initiative in resilience, bringing together different industries and leaders across the finance and investment value chain to develop practical solutions to advance climate change resilience. This new coalition realizes that current efforts to adapt to physical climate risks and deliver resilience for exposed assets and communities is severely lacking and needs to be urgently addressed.
The focus is on the $90 trillion that is earmarked globally for infrastructure up to 2030. The big question is, how much of it will be built with climate resilience in mind? The lack of climate risk standards has resulted in an inefficient allocation of capital when it comes to the protection of assets from physical climate risks.
The good thing is that we are now rapidly developing consistent analytical tools and metrics - the technology is scaling up, and so are the data sets - to better understand climate risk, even at the local level. This will enable us to effectively quantify it, price it and in the process, mitigate future human and financial disasters. Already there is a systematic shift in thinking.
That’s because there is increasing pressure from all stakeholders, from investors to rating agencies, banks to governments, insurers to engineers, to do this right now. No one wants unquantified risk on their books and de-risking investments is vital. This issue is now firmly on the C-suite agenda as well.
Pricing the risks posed by climate change will create opportunities to build a network of resilient infrastructure in high-, medium- and low-income countries, enabling us to better prevent future disasters.