As heatwaves sweep Europe, regulators are thinking hard about climate adaptation.
The past few days have seen fatalities, fires and broken temperature records, with Italy imposing bans on outdoor working, and farmers across the region reporting irregular harvests.
Last week, IPE reported on a stark warning from the UK’s Climate Change Committee (CCC) about the financial system’s exposure to physical climate risks.
It said extreme weather events put pressure on private capital and drove loan defaults and volatility in financial markets, urging the government to take “critical action” to address these financial risks.
James Alexander, the CEO of the UK Sustainable Investment Forum, said the CCC’s report “makes clear that the UK’s long-term financial stability will depend on how governments respond to the growing threat of climate change”.
Flooding, he said, was increasing insurance premiums and putting 430,000 households at risk of becoming “climate mortgage prisoners” by 2050.
“This would leave whole communities facing financial hardship,” Alexander argued. “But it could also disrupt bank lending and pose wider threats to the UK’s financial system.”
The CCC report came just a day after the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) published its own note on the economic and financial implications of extreme weather events.
It provided 31 case studies that demonstrated how such impacts have materialised already, including increases of up to 17 basis points in inflation, cuts to annual gross domestic product of up to 57%, asset price volatility and market downturns.
Investing in climate adaptation
All of this could be helped by better data and sustained investments in adaptation, NGFS concludes.
But what is an investment into climate adaptation?
“There’s a challenge around defining adaptation investments,” says Hazem Krichene, a senior climate economist at Allianz.
The business case for low-carbon solutions has been clearer, he continued, because they produce revenues.
“For adaptation it’s mainly about avoided losses, so it’s hard to pin down future cash flows. Partly because of this, there’s a lack of visibility about which technologies are available to private investors.”
In a bid to tackle this, Krichene and his colleagues developed an ‘adaptation taxonomy’ last month, identifying 61 eligible activities. Some – like climate consulting, agritech, smart water technologies and air conditioning – are suitable for direct private investment.
“Other areas are generally the preserve of the public sector, such as flood protection,” Krichene says.
And then there are those that require both public and private support.
The EU is preparing a policy package
In the third big development of last week, the European Commission published a summary of what stakeholders had asked EU lawmakers to do about climate resilience.
The document takes stock of nearly a thousand responses to two recent consultations exploring the Commission’s role in ensuring the region adapts to rising temperatures through a new “EU framework for climate resilience” – due to be released later this year.
In its response, business association Finans Denmark said it wanted to see “close cooperation between the EU Commission and the financial sector to establish the appropriate framework conditions and incentives that will continue to promote financing and investments in the green transition and climate resilient solutions”.
Zurich Insurance recommended “embedding resilience as a key principle for rolling out new infrastructure” and called on EU institutions and national governments to use more blended finance instruments.
On the latter, the Commission’s official advisory body agrees, describing blended finance as “an important policy lever for attracting climate resilience investment” in guidance issued at the end of last year to help shape thinking on the upcoming EU framework.
“Blended finance could address the uncertainty surrounding revenue streams for adaptation projects, and the significant risks posed by climate variability, which are a barrier for private investors,” it wrote.
In particular, the group, which comprises experts from both the public and private sectors, recommended the use of public guarantees and first-loss mechanisms to de-risk projects.
It also flagged challenges around information flows for climate adaptation and resilience. “Investors often lack clear, reliable information – both quantitative and qualitative – on the climate resilience performance of assets, and the measurable improvements from adaptation measures,” it observed.
The report namechecked nature-based solutions as an especially tricky area in this regard – although that hasn’t put off all investors.
Claudine Blamey, chief sustainability officer of British insurer Aviva, tells IPE that, while nature loss presents material financial risks, nature investment is a growth opportunity.
“Healthy ecosystems, such as forests, wetlands and reefs, act as natural defences against climate-related perils like floods, storms, and droughts,” she explains, adding that nature-based solutions can serve as “low-cost, self-sustaining defences that absorb excess water during floods and retain it during droughts, reducing risks at source”.
By generating co-benefits for other sustainability objectives like biodiversity, and through market mechanisms like carbon credits, these investments can also deliver long-term, diversified returns, Blamey notes, “making them a resilient and attractive investment”.
Embedding climate adaptation across the economy
One of the biggest demands from respondents to the Commission’s consultation was for climate resilience to be a prerequisite for all public spending and procurement.
This wekk the Scottish government updated its guidance for climate adaptation in procurement, saying “those delivering public-sector contracts need to be prepared for the growing impacts of climate change, ensuring risks are considered through the design, development and operation of services”.
Back in Europe, the region’s standards agency CEN-CENELEC has just published guidance to help standard setters embed climate adaptation considerations into all standards for products and services.
