To date, much of the discussion around climate change among environmentalists and investors alike has focused on strategies for mitigation—containing or reducing emissions levels and global temperatures.
But as Cambridge Associates’ managing director specializing in clean energy investing Liqian Ma suggested in a recent interview in Bloomberg’s sustainable finance newsletter, this approach could be shifting. Instead of—or along with—mitigation, investors may increasingly prioritize climate change resilience strategies.
From Climate Change Mitigation to Resilience
“I think in the next five to 10 years we’ll see more strategies dedicated to resilience and adaptation,” Ma said. “Most of the products we’re seeing right now are more about mitigation and reducing carbon footprint and impact, such as renewable infrastructure, energy efficiency, clean water strategies.”
One major touchstone of the approach that has been common in recent years is the Paris Agreement and its goal of keeping global temperatures from rising more than 2° Celsius. Investors, in turn, have contributed to mitigation efforts by supporting companies and funds that explore alternative and renewable energy sources like solar and wind. Some institutions have also decided to divest from fossil fuel companies, corporations with large carbon footprints or even those that deny climate change.
Meanwhile, tools like Morgan Stanley’s Climate Change Mitigation Opportunities Index have further helped investors turn mitigation goals into realities. The Global Impact Investing Network’s (GIIN) Climate Change Track focuses on promoting mitigation tactics through multiple avenues, including clean energy access and sustainable forestry. But among the “potential future themes” listed on the GIIN’s Climate Change Track website are “resilient infrastructure” investments.
Despite efforts by investors and other public and private stakeholders, the enormous and complex challenges posed by climate change may necessitate other approaches—especially, as Ma suggested, in consideration of the long-term view. Looking into the future, some have begun to think not just about how human activity leads to climate change but also how humans might best react to it, “adapting to life in a changing climate” and “adjusting to actual or expected future climate,” as the National Aeronautics and Space Administration puts it.
“Even if we limit the rise in global temperatures,” writes the United Nations Development Programme’s Achim Steiner, “climate change is here to stay.”
Climate Change Resilience Strategies: Challenges and Successes
Accepting Steiner’s claim as their starting point, resilience strategies look to develop the most effective ways of adapting to or overcoming the range of environmental effects climate change brings about, from rising sea levels and more frequent catastrophic storms to droughts and food shortages.
One reason responders to climate change have been slower to turn to adaptation may be the special challenges that come along with it. For investors, Ma noted that resilience is “much tougher to value” and that “the timing of resilience investments can be harder to assess,” since climate change effects like extreme weather events can be hard to predict. “Mitigation is a little easier to underwrite from an investing perspective,” said Ma. “We know what the cash flows of a 30-year solar farm will be, and the technologies are mature.”
At the same time, some of the most vulnerable communities to these threats are those in developing and poor nations, which may not have the resources to fund infrastructure projects. But as the International Monetary Fund (IMF) notes, there are a number of climate change adaptation success stories to be found in these areas already. Examples include:
- Ethiopia’s Productive Food Safety Net, which provides both cash and food to families in need. In exchange, families work on projects focused on land rehabilitation and water source improvements.
- Malaysia’s Stormwater Management and Road Tunnel (or SMART Tunnel), a project that not only improves transportation infrastructure for Kuala Lumpur but also serves as additional storm drainage to deal with flash floods. Weighing long-term costs, the IMF reports that while the tunnel took $500 million to build, it should “prevent more than $1.5 billion in flood damage and reduce the costs of traffic congestion by more than $1 billion over the next 30 years.”
- Centralized air-conditioning in Gujarat, India, where a cooling system consisting of chilled water distributed through underground pipes could use up to 50% less energy than individual air-conditioning units. Relief from the heat is about more than comfort, as the IMF points out—it’s about protecting health and maintaining productivity.
The Global Adaptation & Resilience Investment Working Group (GARI) notes that while resilience is in part a risk-management strategy, it can also be seen as an opportunity for investors to generate financial returns by supporting companies that improve resilience and adaptation, from weather analytics companies and those that provide catastrophe modeling to companies involved in water management and drought-resistant farming.
Finally, the green bond market may be making a shift from its emphasis to date on mitigation projects to those aimed at adaptation and resilience, which only 3% to 5% of green bond issuances have sought to finance, according to the Marsh and McLennan Companies Global Risk Center’s 2018 Climate Resilience Handbook. That said, the Handbook identifies multiple promising options under the green bond umbrella, including catastrophe bonds, high-yield products that help defer risk against unpredictable disasters; environmental impact bonds, which pay investors according to the success of the projects funded; and resilience bonds, still in the conception and pilot phase, which would help protect municipalities from catastrophe while also funding climate-proofing projects.
Ultimately, the complexity and high stakes of the risks associated with climate change mean that a single strategy alone is unlikely to suffice. Without mitigation efforts, the costs of adapting to climate change grow steeper, while a failure to plan for environmental impacts in the pipeline or already materializing misses the full scope of the problem. This is why seeing investors and others take a multifaceted approach could be a cause for optimism.