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Vermont's Climate Superfund Act, the Fed's Climate Scenario Analysis, and More

Fossil fuel companies could be made to pay into adaptation fund under new law

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Vermont legislature approves groundbreaking Climate Superfund Act, the Federal Reserve publishes findings from its inaugural Climate Scenario Analysis, New Zealand launches cross-party inquiry on adaptation framework, The Vatican hosts a climate resilience conference, and a catastrophe modeling-focused research initiative is Innovation of the Week.

🚨ICYMI: the Climate Proofers podcast launched last Tuesday, starring UN High-Level Climate Champion Sabrina Nagel.

👂 Download/listen to the show HERE. A new episode drops tomorrow all about coastal resiliency, with special guest Eugene Montoya.

Vermont Greenlights Climate Superfund

It’s happening … maybe! Last Friday, the Vermont Senate passed the Climate Superfund Act, a first-of-its-kind bill that would force fossil fuel companies to pay for “climate change adaptive or resilience infrastructure projects.” The proposed law is now headed to the desk of the state’s Republican Governor, Phil Scott.

The Act won broad support from both chambers of the Vermont legislature and across party lines. Earlier this month, 106 of the 150 members of the House of Representatives gave it the thumbs up.

If enacted, a roster of fossil fuel giants such as ExxonMobil, Chevron, and ConocoPhillips would be billed for climate damages in proportion with the climate pollution they caused between 1995 and 2024.

For decades, fossil fuel corporations knowingly destroyed our planet for short-term profits. I am proud that Vermont will go further than any other state in forcing the fossil fuel industry to pay for the destruction caused by the crisis of climate change.”

These contributions would then be parceled out by Vermont’s Agency of Natural Resources to support climate-resilient infrastructure, protect public buildings, and invest in preventive health care programs for climate change-induced illnesses, among other things.

Vermont has been laid low by devastating climate shocks in recent years. Last July, ferocious storms incurred over US$1bn in damages. Moreover, research suggests that flooding in the Lake Champlain basin could exceed US$5bn by 2100.

Governor Scott can either sign or veto the bill. If he takes no action the bill automatically becomes law five days after its passage. If vetoed, the legislature could gather in June to hold an override vote.

However, even if signed, the future of the Act is far from assured. In a March letter, the American Petroleum Institute warned the Vermont Senate that the then-proposed bill was “bad public policy and may be unconstitutional”, teeing up a potential legal fight.

The fate of the Vermont Act is being closely watched by other states working to set up their own superfunds. New York, Massachusetts, and Maryland have all proposed similar laws. The New York Senate passed its take on the legislation on May 7, and it now goes to the state assembly for consideration.

Last week, Climate Proof dived into a report on blended finance and how it could increase capital flows into adaptation.

Check out the article HERE and become a premium subscriber to receive features like this every Thursday.

Subscribers now also get access to Climate Proof Data, including the S&P 500 Climate Physical Risk Signals data dashboard.

Fed Asks: Is Wall Street Climate Resilient?

Wall Street banks had to test the resilience of their loan books to extreme weather shocks as part of the Federal Reserve’s inaugural Climate Scenario Analysis (CSA), the findings of which were published on Thursday.

However, readers are likely to have more questions than answers after perusing the report. The Fed did not provide a bank-by-bank breakdown of climate-sensitive exposures or data on each lender’s estimated loan-losses following the hypothetical shocks. Moreover, the aggregated information they did disclose does not go deep enough to yield many firm conclusions.

Here’s what we do know. The six bank participants –  Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo – had to test specific portfolios against projected physical and transition-related impacts from climate change. The physical risk component required each bank to subject their property loans to three hypothetical hurricane shocks in the US northeast of escalating severity, and to three “idiosyncratic” shocks they chose for themselves.

Under the most severe hurricane shock, the banks in aggregate estimated that more than 1,000 commercial real estate loans and 238,000 residential home loans would be impacted – around 20% and 50% of their total exposures in the northeast, respectively. 

The severity of the projected impacts varied wildly. Under all scenarios, for most loans the estimated increase to probability of default was between zero and 50 basis points (bps) – about half of one percent. However, a sliver of loans were estimated to become 500bps riskier or more.

Estimated probability of default impacts from physical risk module of Fed Climate Scenario Analysis

In general, the “idiosyncratic” shocks crafted by the banks themselves resulted in larger estimated impacts, averaging 260bps for commercial real estate loans and about 110bps for residential loans. This makes sense, as these shocks had to be tailored to be especially damaging for each bank. The Fed said some participants bundled wildfire, flood, storm, and hurricane risks together to produce their idiosyncratic shocks while “others limited consideration to fewer hazards.”

What we don’t know is how these common and idiosyncratic shocks affected the loss-given default of affected loans — in other words, how much the banks stood to lose if their borrowers defaulted. Readers were also left in the dark as to the dollar amount of expected credit losses under the different scenarios, along with any clue as to effect on regulatory capital levels — a closely-watched gauge of bank health. 

In the place of this hard data, there was plenty of commentary on how difficult the banks found the CSA. The Fed said participants faced “significant data and modeling challenges” in conducting their analyses.

These issues likely mean the results are rife with gaps and underestimations. For example, the Fed noted that banks were inconsistent in modeling the spillover effects of the simulated physical shocks — like economic disruptions in the wake of a hurricane, or retreat of insurance coverage following a devastating flood. 

Tackling these challenges should now be the focus of the participating banks. However, the Fed has not said whether a repeat exercise is forthcoming. Absent regulatory pressure or the prospect of a future CSA, it’s an open question whether the six participating lenders will feel the need to further climate-proof their portfolios.

Kiwis Collaborate on Adaptation

Lawmakers in New Zealand are putting their differences aside in an effort to climate proof their storm-lashed islands.

Last Thursday, the country’s parliament agreed to set up a cross-party inquiry on climate adaptation, with the goal of establishing a robust framework that helps communities and businesses understand what investments will be made in their areas and how the government will make decisions before and after disasters strike.

“Here in New Zealand, we are feeling the impacts of climate change and we are seeing more frequent and severe damaging natural events such as flooding, storms and landslips. Natural disasters are costly, and we need to take steps to safeguard against loss and ensure the things we value most — our communities, jobs, industries and homes — are prepared to withstand the impacts of climate change.”

New Zealand Climate Change Minister Simon Watts

The National Party-led government has pledged to meet New Zealand’s climate targets, though it has been criticized from some quarters for rolling back environmental safeguards. The inquiry may go some way to preventing climate adaptation being used as a political football by the government’s various coalition parties — not to mention the opposition Labor and Green parties, which welcomed the initiative.

Climate-driven shocks have rocked New Zealand in recent years, most notably Cyclone Gabrielle, which trashed some 1,600 homes, and the Auckland floods. Some 440,000 houses and other habitations are in known flood risk areas, with a replacement value of some NZD$218bn (US$131bn), according to a 2023 academic paper.

Vatican Boosts Resilience Agenda with Star-Studded Conference

Policymakers from around the world are heading to the home of the Pope this week for crunch talks on stimulating climate resilience investment and innovation. 

The Vatican-led conference, “From Climate Crisis to Climate Resilience” has a stellar invite list, including California Governor Gavin Newsom, New York Governor Kathy Hochul, and the mayors of Rome, Sao Paolo, Boston, Paris, and London, among others.

“We no longer have the luxury of relying just on mitigation of emissions,” the conference brochure reads. “We need to embark on building climate resilience so that people can bend the emissions curve, survive the climate crisis, and bounce forward to a safer, healthier, more equitable, and sustainable world.”

The Vatican’s overarching objective with the talks is to get participants to sign a “Planetary Climate Resilience protocol” that will sketch out “guidelines for making everyone climate resilient.” The intention is for this to be submitted to the United Nations Framework Convention on Climate Change for consideration by member states.

The Vatican’s advocacy on climate issues has been pushed by Pope Francis, who inspired the establishment of the Laudato Si’ Action Platform, which works to develop “concrete actions to protect our common home.”

💡Innovation of the Week💡

Climate Proof has been all over efforts by the US government to gird the re/insurance industry for escalating climate-driven catastrophe (cat) events. A torrent of dollars has been funneled into climate data, services, and tools under the Biden Administration already, and the flow shows no sign of running dry anytime soon.

The National Science Foundation (NSF), an independent US agency with a US$10bn budget, is the latest contributor to the cause. The Foundation has been seeding so-called Industry-University Cooperative Research Centers (IUCRC) to bring together academics, scientists, risk professionals, and public servants to tackle big challenges — including climate change.

Last week, Lehigh University in Pennsylvania announced it had been awarded an NSF grant to develop an IUCRC dedicated to disaster resilience and recovery. The grant, which could amount to US$10 million over 10 years, will be deployed by the University's Center for Catastrophe Modeling and Resilience as part of an effort to raise the esteem of cat modeling in academia and “address the most fundamental problems in the field.” Rice University in Texas is co-leading the Center.

As part of its application, Lehigh said the grant could help with understanding how climate change is affecting cat models, addressing issues of insurance equity, and improving rapid response and recovery in the wake of disasters. 

These learnings could feed into the burgeoning climate risk management industry and enhance the development of commercial cat models used by insurers and banks to gauge their exposures to climate shocks.

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