The link between climate risk and making cities attractive to investment
The impact of a changing climate on the frequency of natural disasters means cities must take more responsibility for understanding and managing their risk if they are to remain attractive to inward investment, say Greg Lowe and Julia Brickell, ahead of the Designing City Resilience event in London in June. This article is published in CRJ 10:4, June 2015.
The UN Climate Summit, held in New York in September 2014, aimed to raise political momentum and action to reduce greenhouse gas emissions and build resilience to climate risk, ahead of this November’s climate change negotiations in Paris.
A key objective of the summit was to agree actions to address the challenges caused by changing climate and the increasing frequency and severity of natural disasters.
The reoccurrence of hurricanes, tropical storms and severe flood events can now be measured in decades, rather than centuries. Certainly they are happening within the lifetime of a project, a building or piece of infrastructure and, in some parts of the world, an occupant’s tenure.
Of course, the risk of natural disasters can never be entirely removed, particularly when considering city geography as, more often than not, cities have grown organically from small settlements in vulnerable areas. The issue is that with rapid urbanisation, the losses resulting from natural disasters, and the effect on return on investment, are far greater than ever before and are becoming unsustainable.
As stated in the Sendai Framework for Disaster Risk Reduction 2015-2030, published after the UN World Conference on Disaster Risk Reduction in March (see p40), the public and private sector must continue to work together to integrate natural disaster and climate risk into global financial regulation.
Willis’ 1-in-100 Initiative, launched at the UN Climate Summit, aims to do just that. At its heart is the 1-in-100 year solvency ‘stress test’ – similar to the scientific approach adopted by the insurance sector in the past 25 years to assess its own ability to manage risk.
The test evaluates the maximum probable annual financial loss that an organisation, city or region could expect once in a hundred years, enabling them to understand their risk and manage it more effectively and economically.
A number of other global insurance industry initiatives are underway. For example, the Resilience Modelling and Mapping Forum is co-ordinating research and providing access to open modelling and mapping platforms, which is vital to give cities and organisations the data they need to evaluate their exposure to natural disaster risk.
A general lack of understanding remains a big risk. It is clear that the impact of risk exposure, particularly in economic terms, is not well understood, either by individuals or city governments.
For example, while a one-in-a-hundred year event has a one per cent chance of happening in any one year and hence could be perceived as ‘low risk’. Over 20 years, this risk rises to 20 per cent. Clearly, 20 years is well within the lifespan of a building, an infrastructure operating contract and residency of a home.
A further impact of high-risk exposure is that insurance penetration is low in the world’s most vulnerable regions. Insurance is a cost-effective way to finance disaster recovery and incentivise resilience. This issue is not merely restricted to the developing world: a significant proportion of New York’s infrastructure damaged by flooding caused by Hurricane Sandy in 2012 was uninsured, with losses being picked up by the US Government.
Where natural disasters occur regularly, such as in flood or earthquake-prone regions, sharing risk through ‘risk catastrophe pools’ has become popular in recent years. Funded by government and through taxation (typically nationally), these provide for protecting buildings and infrastructure, but also for disaster recovery.
Therefore, to encourage investment, city governments will be forced to consider and declare their risk exposure and how they are working to mitigate that risk, if their city is to remain competitive in the global market.
Inevitably, cities will have to disclose their exposure to risk in their annual financial reports. This ‘city share price’ will be a measure of how attractive a city is to investors.
Cities remain the most exciting and vibrant places for private sector development, but increasingly, resilience will become a crucial aspect of the risk management process. In fact, resilience is expressed as the cost of finance: the more resilient the investment, the easier it is to finance.
This focus on resilience is already changing investment patterns. Increasingly, the private sector is choosing those cities demonstrating they have the political, social, economic and physical resilience that makes them adaptable to future shocks.
This raises a big issue. Developing cities, which have rapidly growing populations and are at the greatest risk from natural disasters, often do not have the financial resources or the political will to plan for resilience – even if there is an acceptance of the need to do so. Their short term challenges, such as food shortages, social unrest and resource scarcity, are far more pressing than developing a long-term plan to make them more attractive to investors.
And this is a global problem. Cities are no longer self-contained, so even if a resilience plan is in place, a city’s reliance on global supply chains for food and other resources means that any weakness in that supply chain could have significant effects.
It is therefore in the best interests of national and city governments to encourage and, if necessary impose, resilience throughout their supply chain.
This will help to ensure they remain competitive and attractive to investment.
Investors have to make increasingly difficult choices when it comes to investing in cities. Inevitably they will pick those cities that can prove their resilience – not only within their city walls, but around the world.
So it is clear that to make themselves more resilient and competitive in the global economy, cities need to take responsibility for understanding and managing their risk more effectively.
The long-term socio-economic benefits of this approach far outweigh the short term pain. As Swiss Re CEO Michel Lies pointed out at the UN Climate Summit: “Up to 65 per cent of climate risks can be averted through conscious risk management and cost effective resilience.
Greg Lowe is Executive Director in the Capital, Science, and Policy Practice at the Willis Group. Lowe sits on the boards of the UNEP FI North American Task Force and ClimateWise, and the Business Advisor Board of Living With Environmental Change.
Julia Brickell is the Head of the International Finance Corporation’s East Asia Pacific Regional Office in Hong Kong, fronts its programme in Climate Business in East Asia Pacific and is the Programme Lead for Cities in East Asia Pacific. Previously, she worked on urban transport and Public Private Partnership projects in the Middle East, Europe and the United States
Designing City Resilience, London, June 2015
Greg Lowe and Julia Brickell are two of the global experts who will speak at Designing City Resilience, a two-day summit organised by the Commonwealth Association of Architects and RIBA, taking place on June 16 – 17, 2015 in London. At the heart of this international summit will be the City Resilience Challenge, a workshop-based initiative in which delegates will work on real life cities, collaborating to establish a vision for city resilience.