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  • Smokehouse Creek Underscores Climate Threat to Insurers, Suncorp's Chief Highlights Adaptation Investment Dilemma, and More

Smokehouse Creek Underscores Climate Threat to Insurers, Suncorp's Chief Highlights Adaptation Investment Dilemma, and More

Texas' worst-ever wildfire could cause hundreds of millions of dollars of insured losses

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Texas’ record-breaking Smokehouse Creek Fire adds to insurers’ climate woes, New York City debuts Green Economy Action Plan, NZ insurance chief highlights reputational risk of climate adaptation investment, a look at urban resilience research, and the US Department of Energy stars in Innovation of the Week.

Last week, Climate Proof interviewed the movers and shakers behind the Climate Bond Initiative’s new resilience taxonomy. Check out the article HERE and become a premium member to receive features like this every Thursday.

Texas on Fire

Texas is burning. The Smokehouse Creek fire, the state’s biggest ever, had scorched more than one million acres as of March 1, and continues to rage untamed at the time of writing. At least three other wildfires are burning out of control in the Lone Star State, too.

The fires underscore the importance of increased climate adaptation and resilience (A&R) investment, which can reduce the impact of these blazes and buttress hard-pressed public and private institutions buckling under the strain of ever-greater disasters. The financing need is only going to increase over time, too. A study commissioned by the think tank Texas 2036 found that the state’s wildfire risk is going to increase over the next two decades thanks to hotter temperatures and greater dryness.

Insurance companies, the traditional frontline providers of resilience financing to businesses and households, are already in retreat. Texas is seeing insurers either hike premiums for homeowners or exit parts of the state entirely as they grapple with their wildfire exposure. Insurance broker and financial services company Aon says that the economic and insured losses could reach into the hundreds of millions of dollars, perhaps enough to scare away even more underwriters from servicing at-risk areas.

This makes the National Association of Insurance Commissioners (NAIC) strategic focus on climate risks timely. As mentioned last week, the coalition of insurance regulators is working on “new resilience tools” so the industry can get a handle on escalating climate risks.

The federal government is also keeping a close eye on climate risks to the sector. Though insurers are regulated at the state level, the US Treasury has a Federal Insurance Office (FIO) tasked with monitoring the industry nationwide. In a 2021 Executive Order, President Biden directed the FIO to analyze climate-related gaps in insurance oversight and assess “the potential for major disruptions of private insurance coverage in regions of the country particularly vulnerable to climate change impacts.”

In line with this Executive Order, last Monday the Treasury hosted a roundtable discussion with climate and consumer groups to do just that: find out how climate risks are affecting the insurance market. The Treasury next plans to gather industry stakeholders to discuss the same. 

Texas’ plight is sure to be on the agenda, and is likely to shape both the FIO and NAIC’s climate efforts going forward. The question is what the end result will be. If after all the data is analyzed and all the discussions done, it becomes clear that in some parts of the country insurance is no longer commercially viable, what happens? State-backed entities may be forced to step up, but as is the case in Florida, it’s not clear that these “insurers of last resort” have the capital to survive an increasingly climate-ravaged world. In the worst case, “insurance deserts” may force families, businesses, and even entire communities to abandon their homes.

One way to stave off this eventuality is to make it less likely that insurers incur crippling losses when disaster strikes fire-prone areas. This is the thinking behind recent efforts by the Insurance Institute for Business and Home Safety, which is trying to figure out how homeowners can adapt their properties to make them less at risk from blazes, and working on ways to reduce the risk of big fires starting in the first place. 

This kind of A&R research could yield solutions that halt the spread of insurance deserts, and prevent vast tracts of the US from becoming all but uninhabitable. 

NYC Mayor Splashes Out on Climate Startups

New York City is no stranger to climate-driven risks. Now it wants to be a home for climate opportunities, too. 

Last week, Mayor Eric Adams unveiled a Green Economy Action Plan to help climate-proof the city and advance its net-zero ambitions. The tentpole announcement is a US$100mn earmark for a Climate Innovation Hub at Brooklyn Army Terminal, designed to nurture climate startups and help bring new mitigation and adaptation products to market. The Hub plans to cater to 150 startups over 10 years, producing 600 “green collar” jobs and US$2.6bn in economic impact.

A separate US$725mn investment by Brooklyn Navy Yard, the NYC Economic Development Corporation, and the Trust for Governors Island will go toward establishing a “green economy ecosystem” across New York Harbor. This will link up and expand existing green economy projects like the New York Climate Exchange — a forthcoming center for climate research on Governors Island — with the objective of accelerating climate education, research, and innovation.

Adams’ plan is a doubling down on the emergent NYC climate tech economy. Data from Climate Tech VC, a climate economy research company, shows around US$3.5bn of venture capital has been invested in the Big Apple’s climate tech sector since 2021. Though the flow of financing slowed last year amid economic headwinds, the public investment promised through the Green Economy Action Plan should help the city retain its attraction as a climate tech investing destination.

New York City itself is a promising sandbox for new adaptation products and services, given its exposure to climate shocks like floods and storms, not to mention growing concerns over air quality and heat extremes. Recent policy developments may also turbocharge investment in climate adaptation tech. For example, last July City Council Member Keith Powers introduced a package of bills that would standardize indoor air quality for public schools, offices, residential buildings, and municipal properties.

An Antipodean Insurer’s Climate Adaptation Complaint

The chief of Suncorp, Australia and New Zealand’s second-largest insurer, did that rarest of things the other week — he told a journalist what he actually thinks about climate adaptation spending.

In an interview with Interest.co.nz, Jimmy Higgins said the New Zealand government should lead on climate adaptation rather than the private sector because “people will think we’ve got a particular interest that’s profit driven.”

It’s a refreshingly candid statement for two reasons. One, because it suggests the government isn’t doing enough to direct and coordinate adaptation projects and investment already. Two, because it showcases a particular mindset that holds there’s something dirty and untoward about companies investing in A&R to plump their own income statements.

This is a barrier A&R advocates have to overcome if they are to unlock private capital for climate-proofing purposes. Financial institutions are understandably leery about investing in projects that could attract the dreaded “greenwashing” label. And yes, there may be reputational risks associated with certain A&R measures that seem to advantage some segments of the population (for example, richer populations where insurance penetration is high). 

However, companies will only be tempted to invest in A&R at scale if it’s believed to bring about higher revenues and lower costs. Otherwise, they’ll put their capital to work elsewhere. A&R investment advocates, therefore, have to make folks like Mr Higgins more comfortable making profits out of their adaptation efforts. This may require a degree of public education, and a nuanced approach by climate advocates and sustainability nonprofits toward private companies that are taking their first steps in this arena.

Where to Focus Urban Resilience Efforts?

“Urban resilience” is a popular phrase among the A&R crowd, and a focus of investment too based on recent taxonomy initiatives. It makes sense. Cities are densely-packed economic hubs typically situated in the path of extreme weather events: think New Orleans and Hurricane Katrina, or Jakarta and the encroaching sea. Reinforcing cities against climate risks is therefore essential to safeguarding countries’ prosperity.

A recent literature review sheds light on how scientists are thinking about this topic, and describes those neglected areas that may benefit from some extra attention. This finds that while there’s plenty of focus on urban planning and infrastructure construction and maintenance, the research corpus to date is lacking when it comes to disaster prevention planning, resilience and spatial integration, and regional linkage.

The paper’s authors say that future research should look to uncover interactions between urban systems and climate change. They further highlight new technologies that could help with resilience planning, such as big data crawlers, sensor technology, digital image recognition, and interdisciplinary modeling methods. Improving how cities predict and prepare for unknown risks via the observation of “human, logistics and information flows” is another recommendation. 

The technologies cited are redolent of those referenced by the World Economic Forum’s Tech for Climate Adaptation Working Group, and suggest investment targets for A&R investors focused on urban resilience. It’s interesting how far removed these are from the perhaps more obvious investments in office cooling tech, air filtration, and heat-resistant materials. Indeed, they suggest there are still big data gaps that need to be filled in order for effective urban resilience to take flight.

One quick coda: the paper also says governments and financial institutions “can further explore the ecological paths of urban resilience construction that combines resilient infrastructure with nature-based solutions.” Yes, it’s that buzzphrase we’ve all come to know and love. Certainly, nature-based solutions have a big role to play in urban resilience, and investors may be turned on to this as an investment theme if eligible projects also speak to mitigation, adaptation, and nature restoration goals at the same time.

💡Innovation of the Week💡

Here’s another buzzphrase used increasingly often in connection with climate change: artificial intelligence.

AI may be simultaneously hurting and helping global decarbonization efforts, but it holds great promise when it comes to adaptation. The abovementioned paper on urban resilience is a case in point — AI could draw out patterns from the flow of people and goods through cities to help craft innovative adaptation policies.

The US Department of Energy (DoE) is looking to embrace the technology as part of its own climate adaptation efforts. In a request for information (RFI) posted March 1, the agency asks for help putting together a report on how AI could enhance electric grid infrastructure and strengthen resilience. The report is mandated under President Biden’s October 30 executive order on “Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence.”

Potential respondents to the RFI are told to provide specific and actionable information on AI’s applications in a variety of areas, including improving the “security and reliability of grid infrastructure and operations and their resilience to disruptions.” Under this heading, the DoE explicitly requests insights on how AI can help characterize the impacts of climate hazards on electricity system infrastructure.

Elsewhere, the RFI asks for info on how AI could be leveraged to: forecast climate-driven extreme events, like wildfires and floods; predict their impacts on grid reliability and resilience; understand and forecast how climate change may affect resource adequacy and availability; and improve “numerical weather prediction models.”

The DoE hopes the RFI will help it better understand the costs and labor involved in adopting AI tools, systems, and practices that could benefit the public.

It’s a development that should be widely welcomed. After all, an AI-savvy DoE could be more effective at providing much-needed climate data and analytics to utilities and other participants in the US electricity market, and potentially offer services of its own at lower costs. 

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