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  • Global Insurers Tout Climate Resilience Blueprint, Biden's Millions for Climate-Proof Transportation, Debt-for-Climate Swaps, and More

Global Insurers Tout Climate Resilience Blueprint, Biden's Millions for Climate-Proof Transportation, Debt-for-Climate Swaps, and More

BlackRock to help Insurance Development Forum drive investment in infrastructure projects

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Insurance Development Forum to catalyze credit investments in climate-resilient infrastructure, Biden Administration rolls out $830mn of grants for climate-proofing roads, bridges, railways and more, Debt-for-Climate swaps research, a fresh approach to calculating agriculture sector risks to the financial sector, and a new flood mapping tool is Innovation of the Week.

Last week, Climate Proof dissected the new Guide for Adaptation and Resilience Finance by Standard Chartered, KPMG, and the UN Office for Disaster Risk Reduction. Read the article HERE and become a premium subscriber to receive features like this every Thursday.

Insurance Group Pioneers Climate Resilient Infrastructure “Blueprint”

Global insurers manage more than US$40trn in assets. Mobilizing this capital in support of adaptation and resilience (A&R) could go a long way to closing the multi-billion dollar adaptation finance gap highlighted by the United Nations.

The Insurance Development Forum (IDF) is on a mission to catalyze this shift. Last Wednesday the UN-backed public-private partnership, which boasts members from Swiss Re, the World Bank, and Axa, announced a plan to boost insurers’ investments in climate-resilient infrastructure in emerging markets and developing economies.

Their so-called “blueprint” aims to drive finance to small and mid-size commercial infrastructure projects, in sectors including renewable energy, water, waste, and transportation. Selected investments will be tailored to the credit requirements of the global insurance industry. The project is the brainchild of the IDF’s Infrastructure Task Force, led by members from French insurer Axa, law firm Herbert Smith Freehills, and independent investment advisory WCM.

We see this as essential for companies’ and countries’ long-term sustainability, and the effective mobilisation of insurance industry capital towards a much-underserved segment of the infrastructure market in emerging and developing countries. 

Michel Liès, chair of the IDF Steering Committee

The blueprint will be implemented by asset manager BlackRock, although exactly how has not been specified. It is possible BlackRock will put together a fund based on the blueprint that global insurers can invest in.

IDF’s activism in this space aims to exploit the capabilities and self-interest of the insurance industry. Underwriters are on the financial front lines of the climate crisis, ratcheting up higher claims from worsening climate-related natural disasters. To continue operating in certain high-risk markets, it’s imperative the assets, companies, and activities insurers’ protect are in some way shielded from these shocks. By investing in climate resilient infrastructure, therefore, insurers can help themselves while also helping vulnerable communities.

Insurers also have the advanced risk analytics and know-how to define and quantify climate resilience, something the IDF’s blueprint seeks to leverage.

The blueprint was welcomed by A&R professionals. Dr Nicola Ranger of the Resilient Planet Finance Lab said on LinkedIn that “this is exactly the type of initiative that we need to see from the re/insurance industry to really turn the dial on adaptation.” 

The question now is what form an investment vehicle based on the blueprint will take, and how attractive it will be to insurance investors typically skittish about assets located in emerging markets, where credit data and returns potential may be poorly understood.

Biden’s US$830mn for Climate Resilient Transportation

The federal spending taps for climate action have been turned on full. Earlier this month, decarbonization fans delighted in the Biden Administration’s announcement of US$20bn for green banks across the US. Last week, A&R mavens had something to cheer about — the awarding of US$830mn in grants for climate-proofing America’s transportation infrastructure.

The money will be spent to harden roads, bridges, highways, ports, railways and more against climate shocks, from wildfires to extreme rainfall. Thirty-seven states, Washington DC, and the Virgin Islands will all get a piece of the pie. Eighty projects in total will receive grants:

  • 26 projects aim to develop resilience-improvement plans, resilience planning, predesign and design activities, capacity-building activities, and evacuation planning and preparation initiatives.

  • 36 projects will enhance the resilience of existing surface-transportation infrastructure by improving drainage, relocating roadways, elevating bridges, or incorporating upgrades to allow infrastructure to meet or exceed design standards.

  • 10 projects will improve the resilience of evacuation routes, enhance their capacity, and/or add redundancies.

  • 8 projects will back the strengthening of coastal highways and non-rail infrastructure.

The grants are part of the Promoting Resilient Operations for Transformative, Efficient, and Cost-saving Transportation (PROTECT) Discretionary Grant Program, which itself is bankrolled by the Bipartisan Infrastructure Law, signed by Biden in 2021.

Members of Congress have been quick to highlight how the finance will benefit their home states. Senator Tammy Baldwin of Wisconsin applauded the arrival of US$500,000 of PROTECT funds to the Badger State, while Senator Alex Padilla announced California would receive US$60mn.

The full list of grant recipients highlights the wide range of resilience solutions applicable to the transportation sector. These include “cool pavement technologies” to protect against extreme heat, “nature-based creek improvements” to deal with flooding risks, and “intelligent transportation components” to support real-time information flow on roadways in the evacuation events.

The Trick to Unlocking US$100bn for Climate Resilience

Here’s a conundrum. Developing countries are those most vulnerable to worsening climate risks. They need to raise finance to adapt their economies and make them more resilient. However, many are already heavily indebted and may lack the fiscal room necessary to sell more debt. So how can they bankroll their A&R priorities?

The International Institute for Environment and Development (IIED) says “debt for climate and nature swaps” are the solution. These are deals struck between a country and its creditors to write off part of the former’s debt load in return for achieving specific climate or nature objectives.

Swaps of this kind have been executed by only a handful of countries to date. For example, last May Ecuador cut its debt burden by over US$1bn in a transaction that retired some expensive outstanding debt in return for guaranteed conservation financing for the Galapagos Islands. 

The IIED says these swaps should be scaled to encompass all countries struggling under heavy debt burdens. The think tank assessed the 49 countries most at risk of defaulting on their obligations for which data could be found, and calculated that US$103.4bn could be relieved using swaps.

“The IMF and World Bank should recognise that the current way of lending just doesn’t work for people or the planet. Our broken financial system must move on from colonialist, 20th-century thinking if it’s going to serve everyone fairly

Laura Kelly, director of IIED’s Shaping Sustainable Markets research group

Doing so would produce a double benefit. First, it would channel more finance into A&R and nature projects in the target countries. Second, it would take some pressure off these countries’ budgets, perhaps allowing them to issue more debt in the future to support further resilience projects.

The IIED’s data analysis has been timed to coincide with the World Bank and IMF Spring Meetings taking place this week in Washington DC. Debt-for-climate/nature swaps typically leverage public finance institutions, which can provide debt guarantees and political risk insurance to lower the financial risk to creditors associated with these transactions. If they can be tempted to back wider use of the instruments, more private sector creditors may be willing to participate in the swaps, and more countries open to using them to meet their climate finance needs.

How A&R Investment in Agriculture Could Bolster the Financial Sector

The path to climate-driven financial chaos may run through the food and farming sectors, a new paper from researchers out of UC San Diego finds.

Here, the authors showcase a new statistical approach to predicting the reaction of agricultural systems to different potential climate futures, and pilot it on data from Brazil. The findings show “increased yield and revenue volatility” by 2050, together with higher loan-loss rates for financial institutions exposed to the agricultural sector. Indeed, the authors project that climate-related loan defaults in Brazil could increase by up to 7% over the next 30 years

What’s particularly interesting about this paper from an A&R perspective is the evidence that investments in climate-resilient infrastructure can shield financial institutions from some level of increased defaults and delinquencies. The authors say this makes the case for “intentional design” of resilience projects which can support farms and farmers as well as the financial sector.

The paper’s also notable in describing how different types of climate shocks can have varying effects on producers. For example, the authors find that extreme rainfall shocks drive both loan defaults and repayment delinquencies, while extreme temperature shocks have less of an impact. 

The regional distribution of climate impacts is also highlighted in the paper. Parts of northern Brazil, for example, are projected to see rainier winters and drier summers, while central Brazil is likely to have fewer weather extremes but higher overall temperatures. This has ramifications for A&R strategies. Policymakers should focus on water storage solutions in northern Brazil, and heat-resistant crops in the center of the country, for instance.

The approach pioneered in the paper has applications beyond the Brazil analysis. In a blog accompanying the paper, Craig McIntosh — one of the coauthors — said the technique “will help populations identify where they are most vulnerable, how climate change will hurt them the most economically and what institutions they should focus on to build resilience.” The method could also equip the UN’s new loss and damage fund with the insights needed to deploy its hard-won capital efficiently.

💡Innovation of the Week💡

Flooding is a peril the US just can’t shake. Over the last 40 years, flood-related losses have cost the country US$4.3bn a year on average. It’s a persistent drag on the economy, not to mention disruptive for tens of millions of Americans. In fact, the National Weather Service estimates 122 million people will be affected by floods this spring alone.

Not all damaging floods can be avoided, and many more are expected as the world heats up. The question facing the US, then, is how it can best build resilience against their impacts. Last week, the Biden Administration released a new Federal Flood Standard Support Tool, which aims to provide one answer.

The standard itself, initiated under the Obama Administration, revoked by the Trump White House, and reinstated by President Biden in 2021, is supposed to ensure federally funded projects are resilient to current and future flood risks. The new tool helps would-be project developers see whether they’re located in areas of high flood risk. Specifically, the tool provides maps with “a higher vertical flood elevation and corresponding horizontal floodplain” than is available through the National Flood Insurance Program.

Use of the tool should lead to better siting of federal projects and ensure those that are at heightened risk get the resources and expertise needed to make them resilient. Ultimately, the aim is to save taxpayer-funded buildings and infrastructure — from renewable energy plants to broadband internet projects — from excessive exposure to raging rivers, coastal storm surges, and other flood risks.

Federal agencies are those most likely to make use of the tool, but non-federal entities are also encouraged to use it to pre-screen projects that might be eligible for federal funding.

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