COVID-19 provokes turning point, as industry leaders drive action to invest in climate resilient infrastructure

Finance and infrastructure investment experts use London Climate Action Week to stress the need for robust climate risk data and analytics, incentives and collaboration...

With US$90 trillion in infrastructure investment needed globally over the next decade to achieve global growth expectations, success will not be possible without a systemic shift in the way projects are financed to build resilience to climate change, warned a group of industry leaders yesterday at an event organised by the Coalition for Climate Resilient Investment (CCRI).

With the need for systemic resilience to shocks and stresses made clear by the COVID-19 crisis, CCRI brought together over 200 policymakers, scientists and investors and business leaders to discuss challenges and solutions to better integrate physical climate risks in investment decision making.

The challenge is critical, according to CCRI, as investment choices made now will lock in for decades either a global network of climate-resilient infrastructure or a collection of exposed assets which will make social and economic activity vulnerable to climate risk. Delivered effectively, solutions and capital mobilised by CCRI will secure risk-adjusted returns and, most importantly, save lives and their livelihoods, especially in highly vulnerable countries.

Once-in-a-century opportunity

The panel of specialists, featuring senior representatives from the World Economic Forum, Aberdeen Standard Investments, S&P Global Ratings, HSBC and DWS, urged key stakeholders across the global community to act now in addressing three specific weaknesses identified as critical barriers to properly assessing climate risk and being able to drive a shift toward a more climate-resilient economy for all countries:

• Incentive structures limited by short termism – There is a crucial need to support longer-term incentive structures that promote resilience, such as regulation and cost of capital, in their growing efforts to foster and reward an appropriate integration of physical climate risks in investment decision making.
• Climate risk data and analytics into mainstream finance – Better data supported by sophisticated analytical tools are needed to properly assess and price climate risk, and to translate exposure into cash flow modelling.
• Sharing expertise across industries and public sector – A collaborative approach focused on building consensus in areas such as analytical methods and financial materiality is pivotal.

International Environment Minister Lord Zac Goldsmith, who opened the event, said: “As we recover from this pandemic, we have a unique opportunity to create a greener and more resilient global economy with governments and the private sector working hand in hand as a force for good. The UK will continue its global leadership in tackling climate change ahead of hosting COP26 next year. The Coalition for Climate Resilient Investment and other partnerships are now more important than ever to help developing countries access the finance they need for adaptation and resilience.”

John Haley, Willis Towers Watson CEO and CCRI Chair, said: “COVID-19 has certainly tested our determination to advance our mandate in what has been a hugely challenging period. Despite the human and economic crisis attached to it, COVID-19 also constitutes a unique opportunity to ensure that climate risk is embedded in stimulus plans and decision making more broadly. Our ultimate goal is that, by advancing more efficient investment decision making practices, we will see lives and economies in developing and developed regions become more resilient.”

Resilient assets more efficient

Carlos Sanchez, Director of Climate Resilience Investment at Willis Towers Watson, said: “Properly integrating physical climate risks in investment decision making is a major opportunity. Resilient assets are expected to financially outperform non-resilient assets.

“Against conventional wisdom, resilient assets are not more expensive assets, but instead more efficient, reliable sources of long-term secure cash flows to investors. Most critically, these assets are certified to fulfil their function of sustaining social and economic activity in the face of growing incidence of climate risks.”

Research shows that the world’s biggest companies have valued the climate risks to their businesses at US$1 trillion in losses from climate impacts over the next five years alone[1].

Properly pricing climate risk in financial decision making will, according to CCRI, align investment flows towards infrastructure capable of withstanding a changing climate. Providing a methodology to quantify the economic and financial risks and benefits will provide a substantial incentive for financial markets to embed resilience upfront.

Since launching nine months ago with 35 institutions and $5tn in assets under management, CCRI has grown to include 53 members and $10tn in assets. During this period, CCRI members have been working collaboratively to develop a framework for cash flow modelling practices and an investment prioritisation tool for governments.

Sanchez said: “To date, cross-industry climate initiatives have primarily focused on climate change mitigation. This Coalition is the first of its kind in bringing together different industries to develop practical solutions to advance climate change resilience.”