Capital must go to adaptation as well as reducing emissions
Recent extreme weather events, viewed in the context of the sixth report of the Intergovernmental Panel on Climate Change, underscore the importance of directing capital not only to reducing carbon emissions but also building resilience to the changing climate.
Wildfires are burning in Greece, Turkey, Italy, Russia, California and British Colombia amid heat waves and droughts. Floods have recently caused devastation in Germany and China. Scientists are detecting increasingly sure signs that the Gulf Stream is weakening, a development which could disrupt rain patterns in West Africa and plunge Europe into a deep freeze.
The IPCC report published on Monday is packed with evidence that things are going to get even worse. With concerted effort, humans may be able to rein in temperature rises by a certain amount. But climate change cannot be avoided entirely, only slowed down, or “mitigated”. It is already happening, and it may be irreversible.
That means that a huge investment is also needed in our other response to climate change: adaptation.
Most of the environmental focus in the capital markets to date has been on reducing carbon emissions, whether by ring-fencing the proceeds of special bonds for renewable energy projects or linking coupons to carbon reduction targets.
Directing capital to climate adaptation projects is more difficult, for obvious reasons. Renewable energy projects generate cash flows by selling their useful energy, making them eminently financeable, even without a green label. Energy efficiency measures result in lower energy bills, so they also produce an economic return without too much financial engineering.
In contrast, infrastructure that reduces the impact of climate change on communities can be very expensive, while the impact, though sometimes obviously beneficial, is difficult to put a price on.
These issues were highlighted in GlobalCapital’s sister publication, GlobalMarkets, three years ago. That was around the time that the European Bank for Reconstruction and Development issued its first climate resilience bond, based on the Climate Resilience Principles that had just been published by the Climate Bond Initiative.
But the climate resilience bond has been slow to catch on. Climate change adaptation is increasingly included as one of the acceptable uses of proceeds of green bonds, but the capital is still more likely to be channelled into carbon emission reduction projects that are easy to find and yield a solid return.
This is not to say that investing in or incentivising low carbon businesses or projects is a bad thing. But there are already tens of billions of dollars earmarked for it. The challenge is to make sure that climate resilience also attracts the capital that it needs.
Build back faster
There are signs that the pace is beginning to pick up. The ‘build back better’ schemes proposed by multilateral development banks in the wake of the Covid-19 pandemic are a good example. But more action is needed, faster.
This is where the swelling ranks of ESG specialist bankers should be focusing a large part of their efforts, along with their counterparts in government, at supranational agencies, development banks, corporations, institutional investors and in private equity.
There are sure to be ingenious ways to raise the needed funds needed to protect communities that are vulnerable to climate change, but they will not be discovered by selling a green product off the shelf to a client. It will require a collaborative approach, which is how the capital markets function at their best.
Most importantly of all, as the images of disaster come in from around the world, this work needs to begin immediately and proceed rapidly. There is no time to lose.