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How to make resilience attractive to investors

About US$140-300 billion a year will need to be invested globally to adapt to the effects of climate change, but where will the money come from and is the government doing anything to create the incentives that will motivate private investment in the area?

These are the issues raised by the Investor Group on Climate Change’s latest report on the sector, From Risk to Return.

With $226 billion in projected replacement costs for coastal buildings and infrastructure, and $212 billion in at-risk local government assets just in Australia, the report questions the wisdom of an approach that sees our government spend $560 million a year in post-disaster relief and recovery, and just $50 million a year on pre-disaster resilience.

It says the spend on post-disaster recovery costs, even without factoring in climate change, is estimated to rise to $2.3 billion a year by 2050 if resilience isn’t prioritised.

“A hotter world entails substantial change for our infrastructure, our economy and our communities,” Investor Group on Climate Change chief executive Emma Herd said.

“Climate change is already costing business and government millions every year and it’s a simple truth that the longer we wait to adapt, the higher that cost will be. New investment must begin to flow into adaptation solutions, but the path forward is filled with barriers.”

The obvious barrier to the necessary private sector investment is that a revenue stream and commercial investment return is not available for many adaptation projects.

Ms Herd told The Fifth Estate the report looked at innovative ways in which a return could be generated for investors.

One is to “blend” mitigation and adaptation investment to generate commercial return and adaptation outcomes.

“More often than not, activities you’re taking as part of mitigation can be applied to adaption,” Herd said.

Take property for example. Investment in energy efficiency activities often also include decisions around insulation. Why not take into account future temperature requirements rather than current ones.

“It’s about extending the thinking.”

The same is true for new build infrastructure. At early stage project planning it’s about thinking about the full dimensional climate change impacts, Herd said.

“By blending it in, there are often ways to get adaptation outcomes [and a return].”

An important first step is the development of a framework for benchmarking adaptation.

“If you look at the mitigation world, we have done a lot about valuing avoided emissions; we’ve come up with a whole framework. We need the equivalent for resilience, that’s useable for investors.”

Environmental Upgrade Agreements are one finance mechanism the report said could be applied to adaptation.

“The funding mechanism and security structure of the EUA via the local council rates mechanism could easily be applied more broadly for adaptation infrastructure with local councils as an issuer of Municipal Adaptation Bonds,” the report says.

Other mechanisms include green bonds, impact investing, Public Private Partnerships for adaptation and local government value capture.

The first step, though, is to produce a national assessment of infrastructure at risk to the effects of climate change and an indicative quantification of the investment required to protect against this.

Ms Herd said bringing together government, industry and investors was important.

“There’s deep pockets of specialised activity going on in local government, industry and the investment community. What we need to do is connect this thinking to deal with the real challenges and real impacts being felt.”

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