Coalition for Climate Resilient Investment targets resilience bonds

A newly launched Coalition for Climate Resilient Investment is set to bring together significant investment and risk industry expertise, with goals including to properly price climate risk, align investment flows with resilience initiatives and to introduce resilience bonds.

The Coalition for Climate Resilient Investment was officially launched yesterday at the United Nations Climate Action Summit in New York.

The initiative is the result of a collaboration between the World Economic Forum, the Government’s of the United Kingdom and Jamaica, insurance and reinsurance broker and investment consultant and advisory Willis Towers Watson and the Global Commission on Adaptation, but brings together a much wider group of major institutional investors and international institutions.

It’s the first financial sector led initiative on climate change of its kind, bringing together 30 organisations from across the investment value chain to address climate resilience challenges.

John Haley, the CEO of Willis Towers Watson is Chair of the Coalition, which will look to integrate climate risks into investment decision-making.The group see this as transformational for infrastructure investment, helping to drive forwards a shift toward a more climate resilient economy for all countries, including importantly the most vulnerable.

John Haley, CEO of Willis Towers Watson, commented on the launch, “This new coalition realizes that current efforts to adapt to physical climate risks and deliver resilience for exposed communities and assets across the globe are severely lacking and need to be addressed urgently.

“The conditions for success are ripe, the coalition will be able to harness a unique combination of the rapid advancement of climate risk analytics coupled with ambitious regulatory and investor-led initiatives.

“Pricing the risks posed by climate change will create opportunities to build a network of resilient infrastructure in high, medium and low-income countries, enabling us to better prevent future human and financial disasters.”

Putting a price on climate risk is something that is often asked of the insurance and reinsurance industry, given the market underwrites exposures that are intrinsically linked to climate related factors, such as weather and natural catastrophe risks.

This initiative will, with the assistance of risk modelling and analytics, as well as underwriting expertise from the insurance and reinsurance space, work with the investment markets to identify how climate related exposures can be priced for and factored into infrastructure related investment decisions.

The Coalition said on its launch that it is vital for society to develop new sources of data and analytical tools that enable it to better understand the risks posed by climate change to society and the wider economy.

“This will enable us to better address these risks,” the Coalition explained, “Preventing future human and financial disasters.”

Infrastructure is vital to society, as well as local, regional and global economies, given it facilitates the flow of goods, services and people that allow us to thrive.

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

The initiative aims to develop a common approach to assessing climate risks, which will help the Coalition to ensure that all their investments are resilient, as well as unlocking additional private finance for resilient infrastructure investment.

The resilience bond, the concept by which a securitisation structure akin to a catastrophe bond or insurance-linked securities arrangement is used to both finance the development of resilient infrastructure and transfer the risks associated with a climate peril.

The resilience bond concept has been around for a number of years now, at least since 2015, but to-date hasn’t seen a successful issuance of any transactions.

The concept is that a single bond structure could finance the development of resilient infrastructure, while also delivering risk premiums on the peril the resilient infrastructure development is designed to protect against.

As the risk is reduced, over-time as the infrastructure is developed, the risk premia paid for the catastrophe bond like protection piece of the resilience bond would reduce, but the financing angle remains.

So these would be a kind of hybrid between infrastructure bonds and cat bonds, offering investors an interesting, albeit not uncorrelated, alternatives investment opportunity that would meet ESG investment guidelines.

The concept of the resilience bond has moved on some and a number of different potential models now exist. It’s encouraging that this Coalition for Climate Resilient Investment is looking closely at this idea as something to push forwards and it expects the work under the Coalition will result in structuring of resilience bonds further down the line.

In addition, the Coalition wants to develop analytical tools including a physical risk pricing framework and methodology by 2020, and will also look at issues such as how to prevent capital flight from the most vulnerable regions and solutions to negate that.

Andrew Steer, President and CEO of the World Resources Institute, and Commissioner of the Global Commission on Adaptation, commented, “Making infrastructure resilient to climate change has been regarded for too long as a burden and a cost. In reality, it’s a high return investment, yielding on average a 4-to-1 return. It also saves lives, reduces risks, and encourages further investment. This dynamic new coalition will help make climate risks visible, leading to better decisions and smarter investments for the future. The Global Commission on Adaptation is proud to be part of it.”

Mark Carney, Governor of the Bank of England, added, “Achieving the transition to a carbon neutral future will require mobilizing mainstream private finance. Advances in reporting and risk analysis are paving the way for investors to realize the opportunities in climate-friendly investment by re-orienting their focus to more sustainable long-term value creation. In this context, the Coalition for Climate Resilient Investment’s focus on integrating climate risks into decision-making will help finance the infrastructure investment needed to build an economy more resilient to climate change.”

A number of country pilot projects are expected to be launched to trial innovations coming out of the Coalition’s work, aiming to protect economies and citizens’ lives from increasing climate impacts.

Nigel Brook, Partner at Clyde & Co, also commented on the launch of the Coalition, which the law firm has signed up to, “The climate crisis will impact everyone. The world’s most vulnerable nations face an existential threat from an increasingly unstable climate, but critical infrastructure in the world’s most advanced economies will also increasingly be affected by destructive windstorms and other extreme weather.

“Up to now cross-industry action on climate change has focused on mitigation. But it is critically important to make infrastructure resilient to climate change. This will require a collective effort to drive a systemic shift in finance. Investors, banks, ratings agencies, insurers and engineering firms all have a key role to play – as do governments, international finance institutions and donors.

“We are delighted to be part of the Coalition that is the first of its kind, bringing together different industries to develop practical solutions to advance climate change resilience. It has been set up to address the crucial need to develop new sources of data and analytical tools to better understand the risks posed by climate change.

“This will enable us to better address these risks, mitigating future human and financial disasters. Our infrastructure enables the flow of goods, services and people which allow societies to thrive. Properly pricing climate risk in financial decision-making will align investment flows towards infrastructure capable of withstanding changing climate. Providing a methodology to quantify the economic and financial benefits will provide a substantial and critical incentive for financial markets to embed resilience upfront.”

Supporting the Coalition are the following companies:

Business: Aberdeen Standard Investments, Acclimatise, Arup, Clyde and Co, DWS, Environment Agency Pension Fund, GARI, GRESB, IGCC, IIGCC, Impax, Jupiter Intelligence, KPMG, Legal and General, Lightsmith Group, Lloyds Banking Group, McKinsey, Meridiam, One Concern, Schroders, Standard Chartered, Willis Towers Watson, Zurich Insurance Group.

International institutions: Asian Development Bank, European Bank for Reconstruction and Development, Environmental Change Institute, University of Oxford, FAO, Global Commission on Adaptation, Global Infrastructure Facility, Global Water Partnership, Green Climate Fund, Green Finance Institute, TCFD Secretariat.