Wednesday, February 26, 2014

Who Will Pay for Climate Change Consequences?

A number of initiatives, including the United Nations International Strategy for Disaster Recovery and the University of Notre Dame Global Adaptation Index, have been developing models to assess climate risk at various scales.

The Organization for Economic Co-operation and Development has been trying to put numbers on the cost of adaptation. The journal Nature Climate Change recently published a paper entitled “Future Flood Losses in Major Coastal Cities” full of some very sobering numbers. The World Economic Forum Global Agenda Council on Climate Change has developed recommendations on financing mechanisms for adaptation. These are just some of the initiatives underway to price the risks of climate-driven weather variations.

It is likely, however, that the extraordinarily complicated questions of what is at risk, what should be done about it and how much should be spent will be easier to address than the political question, who should pay and what’s their share. This is a question our clients, public and private, grapple with all the time as they consider their own risk attenuation. All but the most optimistic agree that substantial new revenue from existing sources dedicated to climate adaptation will not be forthcoming. There is hope that financial markets can develop instruments for investors that produce positive returns for adaptation investments. Without new funding sources, the best we can do is incorporate adaptation benefits into existing spending. But, how much do we spend on probabilities and what is the opportunity cost for that spend compared to existing needs? This is a very contentious political question. In politics, do we see the future considered as a constituent of decisions about the future? Sustainability demands the answer should be yes. For many, quite reasonably given the inability to know the future, the answer is largely no. But, there are future-minded companies out there that have risen above the political hubbub and recognized that protecting their assets from an uncertain, unknowable future is simply good business sense. I reached out to a few of my colleagues to get their thoughts and received some excellent examples of companies and organizations that have redefined this question in terms of sound business strategy.

The best mitigation and adaptation strategies are not stand-alone investments but part of a broader consideration of cumulative benefits.

The City of Blackpool in the UK reaped great benefits from its investment in a new seawall. It took advantage of the opportunity to reconnect the town to its famous beach; provide a better pedestrian experience; and create spaces for events, retail and community interaction. The improved community experience quickly translates into increased commercial success for neighboring businesses. Private and public sectors both win, even if the sea level doesn’t rise.

A similar story is true of the South Bay wetlands restoration in San Francisco Bay. The wetlands regeneration created significant water quality and habitat improvements that the South Bay public welcomed and was willing to invest in because the whole community loves to fish. While the public doesn’t really care about protecting itself from a fabled sea level rise and possible flooding, the wetlands generation will significantly mitigate damage in the event that this occurs.

The successful implementation of both these examples lies in their ability to articulate both public and commercial benefits that extend far beyond the simple cost/infrastructure equation.

The other compelling argument is business continuity. The study by Nature Climate Change estimates that the cost of flooding in the world’s 136 largest coastal cities could be as much as $52 billion a year over the next few decades (an increase of $46 billion a year from 2005 figures). Staggeringly, three US cities — Miami, New York City and New Orleans — could, between the three of them, be responsible for 31 percent of this total annual cost. These three cities stand out as having the most to lose given the contrast between their high wealth and the insignificant level of investment in flood protection.

Just looking at recent experience, the globe is littered with examples of catastrophic business losses in the aftermath of natural disasters. One thousand factories closed in Thailand after flooding. The Great East Japan Earthquake of March 11, 2011, had a serious negative impact on the Japanese economy — not only substantially reducing production in the regions directly affected, but also disrupting supply chains throughout Japan. This summer, the extensive flooding in Eastern Europe cost an estimated $18 billion in economic losses.

But it’s not all doom and gloom. My colleague Dale Sands’ response to my query was much more inspiring. He cited the example of a forward-thinking New Zealand utility enterprise that had reaped great benefit from placing adaptation considerations at the center of its business decisions.

Recognizing that earthquakes are a common occurrence in that part of the world, this company spent $6 million preparing for earthquakes. After the great earthquake of 2010, the utility realized an estimated savings of $60 million because the investments they had made in hardening their infrastructure ensured continuity of service in the wake of the disaster.

Not only did the utility company protect its own assets and revenue stream but its ability to continue functioning in adverse circumstances avoided the additional trauma the citizens of Christchurch would have experienced had they lost power, and also spurred the ability of the regional economy to recover more quickly. The brand equity such outstanding service in adverse conditions must have generated is surely a less tangible but equally important consideration for the future health of the company.

Presenting the case study at the UN Global Platform in May 2013, Roger Sutton, then CEO of the utility and now Chief Executive of Canterbury Earthquake Recovery Authority stated, “…despite the high cost in damages of the 2010 New Zealand earthquakes, the Christchurch economy had never stopped functioning, which was a testament to investments in disaster resilience.”

Our challenge as creators of the built environment is to help our clients recognize that disaster preparation is not an incremental investment but a fundamental element of the core investment strategy. We know that a unit of planning will reduce response actions by four to seven units of expenditure. We also know that the frequency of natural disasters is increasing, and that the majority of the losses are uninsured. Some companies will not put an emphasis on business continuity planning while others will. Some companies will survive and flourish while others will not. Healthy companies cannot thrive in stricken cities any more than a city can flourish without a robust economy. More