Investing in climate change adaptation

Transcription

1 Investing in climate change adaptation Dr. Zsuzsa Banhalmi-Zakar, James Cook University* Dr. David Rissik, NCCARF Investor Group on Climate Change (IGCC) Australian Coastal Councils Conference, Redcliffe, Qld May 3rd, 2017 *Previous affiliation was Griffith University

2 Finance industry s perspectives on climate change Financial institutions perceive environmental issues, including climate change as a risk and an opportunity Climate change is well known to represent risks to the sector and it is accepted that it has the capacity to have financial implications (e.g. damage from extreme weather events) Recognising climate change as a business opportunity is a relatively new concept and has focused on investment into mitigation initiatives (e.g. investing in renewable energy) The finance sector s interest in adaptation (mitigation) is a new 2

3 Investing in adaptation in Australia NCCARF: Mechanisms to finance climate change adaptation in Australia Investor Group on Climate Change, with NCCARF Report: Assessing climate change risks and opportunities for investors Workshop: Path to market (Melbourne, Sept 2016), also with Green Cross Australia Report: From risk to return: Investing in climate change adaptation (March 2017), sponsored by Eureka Real-Assets, launch event in Sydney at Citi Image: A visualisation of the possible Financing the extension of Melbourne s Urban Forest was the topic of the workshop 3

4 Each reiteration of the Intergovernmental Panel of Climate Change shows increased risks likely to result from rising global mean temperatures. Source: Climate Council of Australia 2015, based on Smith et al (2009, 2011), IPCC 4

5 @banhalmizakar 5

6 Adaptation risk and cost estimates in Australia Replacement Value ($ billion) Road & Rail Light Industrial Commercial Residential Lighter bars represent lower estimates & darker bars represent upper estimates Figure forecast of the total economic cost of natural disasters, identifying costs for each state 0 QLD SA NSW WA VIC TAS NT Source: Commonwealth of Australia 2011 Figure 2. The estimated replacement value ($ billion in 2008) for residential, commercial and transport infrastructure for a 1.1 metre sea level 6

7 Local government finances Figure 1. Relative contribution sources of local government revenue (all States and Territories) ( ) Rates Sales of goods and services Interest Other Figure 2. Local government assets and liabilities by state ( ) ($m) Total Assets Total Liabilities Total borrowing Grants and subsidies NSW VIC QLD WA SA TAS NT Source: Banhalmi-Zakar et al 2017, based on 7

8 Features of adaptation initiatives that impact finance/funding options Feature Size/capital requirement Lifespan of project/ initiative Physicality Small (<$25 million) Short-term (now to 2030) Soft measure/initiative (e.g. plan, community capacity building, etc.) Medium Spectrum ($25-$50 million) Medium-term ( ) Scheme (e.g. partnership) Discreteness Part of new structure Upgrading existing structure Large ($50+ million) Long-term (beyond 2070) Ownership Local government Public-private-partnership Private Engineered structure New stand-alone investment Scalability Not scalable Scalable to some extent Scalable to a large extent Beneficiaries Single/few company/ individuals Some (countable) Financial return Unable to generate Able to generate, unable to distinguish/quantify Return on investment timescale Risk reduction Short-term (>2 years) Difficult to demonstrate risk reduction Medium-term (2-7 years) Small-scale risk reduction compared to overall project/business Many/wider community Calculable and demonstrable Long-term (7+ years) Insurability Uninsurable Partly insurable Insurable Demonstrated ability to reduce substantial risk Source: Banhalmi-Zakar and Rissik (2017), based on Banhalmi-Zakar et al 8

9 Potential mechanisms for adaptation finance Type of finance mechanism Bonds -specifically: green bonds, climate bonds, social impact bonds, resilience bonds*, municipal bonds** Project finance Impact investing, social impact investing General description Used to fund groups of projects that satisfy criteria demonstrating green credentials or social impact Lending that funds largescale complex projects, including public-private partnerships New form of finance that targets preventative programs that address social challenges and which can create future cost savings Examples Features Limitations Applicability ANZ Green Bond, NAB Climate Bond, World Bank Kangaroo Green Bond, also municipal bonds (USA) Very common form of finance for infrastructure projects, particularly in the energy sector Various companies exist in Australia, including Social Outcomes, Social Ventures Australia Must be as economically viable as standard ( vanilla ) bonds, with environmental benefit as added bonus A type of finance where the future cash-flow will be used as repayments, involves creation of a special purpose vehicle for the project Works with NGO and government sector to define strong evidencebase and often requires a caseby-case approach to structure the investment Requires standards that can be applied to show that projects meet environmental criteria, there are no standards for adaptation. Only suitable for large projects that can generate substantial revenue to repay the loan Often involves non-traditional techniques, can be time consuming to create evidence-base *Refer to report for the full list that includes small-scale options such as microfinance and crowdfunding All institutional investors, including super funds, fund managers, insurance companies, corporate investors, REITs, with major banks acting as arrangers Major banks and other financial institutions with good track records in PPPs All institutional investors, albeit usually those with a social mandate Type of finance mechanism Corporate finance (balance-sheet based) Environmental Upgrade Agreements Energyefficient loan schemes (bonuses) General description Lending for existing companies for upgrades or building a new project at another site Funds energy efficiency upgrades of existing commercial buildings and the installation of renewables which is repaid by the building owner through the Council rates mechanism. Can conceptually be applied to adaptation measures. Smaller scale equipmentfinance type scheme that provides reduced interest on loan for specific energy efficiency projects Examples Features Limitations Applicability Offered by most banks and the prime mechanism local governments currently use to borrow from Treasuries Used as the funding mechanism by Frasers for the Central Park Trigeneration Plant. Large range of office upgrades have been financed and the pipeline includes works to industrial and retail premises. NAB s Energy Efficient Bonus, Commonwealth Bank s Energy Efficient Loans New project is added onto the company s existing books, allows channelling of funds within a company, would allow local governments to use revenues (rates, usercharges, etc.) to repay loan State Government program which facilitates private sector financiers working with building owners and Local Government. The only mechanism that allows building owners to utilise the energy, water and waste savings from their tenants to repay the finance Relies on industry and government standards (for pre-approval or eligibility) and support (cofinancing) from the CEFC. Not particularly desirable form of finance as it is difficult for financiers to track exactly where funds flow Currently only legislated in New South Wales, Victoria and South Australia. Pre-approval is based on existing standards, which currently do not exist for adaptation Lenders with PPP experience, mostly banks Financiers and investors active in the real estate sector, including the Clean Energy Finance Corporation (CEFC), fund managers, REITs (note that currently restricted to commercial buildings) Lenders that are able to manage several small scale loans efficiently (i.e. usually those involved in corporate finance) Source: Banhalmi-Zakar and Rissik (2017) Based on Banhalmi-Zakar et al 9

10 Investors perspective Barriers to Investing in adaptation Investors identified the following gaps as major barriers to adaptation investment, including lack of: A clearly defined project scope where the adaptation component is made explicit A credible project proponent or counterparty A revenue stream and commercial investment return Adequate project scale An accepted framework for allocating financial benefit (value add) Effective coordination across different levels of government. Potential solutions for increasing investment in adaptation Investors identified the following steps as potential solutions for increasing adaptation investment: Adopt blended mitigation and adaptation investment solutions to generate commercial return and adaptation outcomes Build on the experience of mitigation finance, particularly through aggregation models to achieve investment scale Work with carbon finance agencies to develop investable measurement models for resilience outcomes Seek a more coordinated approach to cross-government ownership of adaptation funding and implementation. Build on lessons learnt from social impact bonds and impact investment in adopting a collaborative approach to project scoping and 10

11 Key findings Adaptation represents and opportunity for investors ( adaptation asset class?) Investment/finance from the private sector is a way to stretch state/federal/philanthropic funds Attn: Finance is not the same as funding! Investor considerations are different to community considerations: Guarantor/sponsor, size, ownership of asset, returns, physicality, beneficiaries, etc. Highly likely that some initiatives will never be able to leverage private sector funds public funds should be reserved for these 11

12 Recommendation Consider how adaptation initiative would be funded early on because it can impact on how it should be structured/delivered Consider using a combination of funding/financing mechanisms to meet the adaptation needs of your jurisdiction (both small and large scale, public and private, including a mix, such as the Betterment Fund) Form partnerships to bundle adaptation projects to reach scale Seek advice and Thistlethwaite Bridge reconstruction (Queensland Reconstruction Authority 2016) 12

13 References Andrews, T., Chau, S., Fu, Y., Lubarsky, K., Smith, D., Waite, J The cost and funding of natural disasters in Australia A current position paper Draft. Institute of Actuaries of Australia. Accessed 28 February Available online at [ ari es.asn.au /Library /Ev ents/gis/2016/naturaldisasterswo rkingg roup2016.pdf]. Australian Business Roundtable for Disaster Resilience and Safer Communities Building our nation s resilience to natural disasters. Accessed 28 February Available online at [ m.au/assets/documents/white%20paper%20sections/dae%20roundtable%20paper%20june% pdf]. Australian Business Roundtable for Disaster Resilience and Safer Communities The economic cost of the social impact of natural disasters. Accessed 23 February Available online at [ ial %20costs/R eport %20- %20The%20economic%20cost%20of%20the%20social %20imp act %20of%20natu ral %20disasters.pdf]. Banhalmi-Zakar, Z., Ware, D., Edwards, I., Kelly, K., Becken, S., Cox, R Mechanisms to finance climate change adaptation in Australia. National Climate Change Adaptation Research Facility, Gold Coast, Australia. Balston, J.M., Kellett, J., Wells, G., Li, S., Gray, A., Iankov, I Quantifying the costs of climate change on local government assets, National Climate Change Adaptation Research Facility, Gold Coast, 215 pp. City of Melbourne Urban Forest Strategy - Making a Great City Greener. Accessed 13 February, Available online at [ e.vic.gov.au /SiteCollectionDocumen ts/urb an-forest-strategy.pdf]. Climate Bonds Initiative History Explosive growth in green bonds market. Accessed 14 October Available online at [ ebonds.n et/market/history]. Climate Council of Australia Unburnable Carbon: Why we need to leave fossil fuels in the ground. Accessed 21 February Available online at [Climate Council of Australia Unburnable Carbon]. IPCC (2014) Summary for Policymakers. In Climate Change 2014: Impacts, Adaptation, and Vulnerability. Contribution of Working Group II to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Field C, Barros V, Mach K, Mastrandrea M (eds)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA. Queensland Reconstruction Authority Lockyer Valley Regional Council - Thistlethwaite Bridge.. Accessed 14 October Available online at [ e-queensland-b etterment-fund-buildin g-resilience/lockyer- valley-region al-council-thistlethwaite-brid 13