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Green Guarantees, Cali Floods Underscore Adaptation Failings, GEF Funding, and More
New spin on blended finance could unlock US$1bn for green infrastructure and other projects
Louie Woodall
February 12, 2024
AI-generated via DALL-E
How The Green Guarantee Company plans to catalyze climate finance, California floods expose adaptation gap, Global Environment Facility signs off on US$200mn of adaptation investments, the ongoing wildfire-induced insurability crisis, and a look at the EPA’s Climate Resilience Evaluation and Awareness Tool in Innovation of the Week.
How to Make Safer Bets on Climate Adaptation
How do you get private investors into risky climate adaptation and resilience projects? Easy — make it so they can’t lose.
I’m simplifying things here, but that’s the general idea behind The Green Guarantee Company (GCC), which launched operations on February 2. Using concessional capital from public sources, including USAID and the United Kingdom’s Foreign Commonwealth & Development Office, GCC will ‘wrap’ high-risk, climate-friendly projects with guarantees to enhance their creditworthiness. The gambit here is that this will make such projects accessible to institutional investors that are only allowed to invest in investment-grade assets, unleashing a wave of new private capital for climate mitigation and adaptation. At the same time, by providing guarantees, the GCC can lower financing costs for project developers.
With US$100mn of initial capital, the GCC hopes to guarantee US$1bn of green projects, moving up to US$5bn or more by 2035.
The GCC want to start by guaranteeing private credit deals and green bonds listed on the London Stock Exchange, prioritizing issuers from Africa, Asia and Latin America — regions at high risk from climate shocks. Projects high on the list include green infrastructure projects, renewable resources, and clean transportation.
We need to use all of the tools available to us to crowd in climate finance to the places that need it the most, and investment grade guarantees are one of the most powerful tools we have.
The company’s launch marks an evolution of the blended finance space. Typically, multilateral development banks and philanthropies have forked out risk-absorbing concessional capital for climate projects to get private investors on board. Each project is unique and painstakingly worked out. It looks like the GCC wants to systematize and scale up the doling out of guarantees. They have a clearly defined list of eligible instruments for guarantees, and are using the Climate Bonds Standard and Certification Scheme to identify climate-friendly projects. Leveraging an existing standard this way should expedite the screening and approval of projects.
I wonder whether this structured approach means some worthwhile projects slip through the cracks. This could be the case if a potential project developer is unable or unwilling to finance using an eligible instrument, or because they don’t align with the certification scheme. One way the GCC may be able to mitigate this risk is by building out reporting services for investors, enabling them to track the impact of their investments. Impact may be expressed in terms of emissions reductions, or — more importantly for adaptation purposes — positive influence on the expected change in loss of lives, value of physical assets, livelihoods, and/or environmental or social losses due to climate shocks.
In the first instance, these reporting services should make private investors more comfortable allocating to GCC guaranteed projects. However, as it becomes clearer through these reports what investors are looking for, would-be project issuers should be able to use this information to better tailor their proposals for a capital-rich but risk-averse audience.
California Floods Highlight Adaptation Gap
California was drenched earlier this month by two “atmospheric rivers” that passed through the Golden State. The downpours flooded Los Angeles and Santa Barbara, knocked out power for some 100,000 Californians, and even caused mudslides and tree falls.
It was a case of déjà vu for beleaguered residents, who were also assailed by extreme rains in January 2023. Preliminary estimates put the economic costs so far this year at between US$9-11bn, much of this attributable to property damage, infrastructure impairment, and business interruption. The price tag is likely to balloon over time. In 2023, costs linked to California’s wet season ultimately climbed to US$37-42bn.
The recent deluges highlight the Golden State’s growing climate risk vulnerability, but also represent a missed opportunity. Heavy rainfall could be used to replenish California’s reservoirs, and counteract the punishing droughts that are hurting the state’s economy. But California’s infrastructure isn’t up to the challenge of capturing excessive stormwater and channeling it to long-term storage, meaning much of it ends up in the ocean.
Public spending authorized by Governor Newsom, and federal cash unlocked by President Biden’s Bipartisan Infrastructure Deal, should improve matters over time. One imagines improving the state’s infrastructure also makes good sense to private investors with existing assets in California that could become impaired by both excessive rainfall and long-lasting droughts. I’ll be keeping an eye out for announcements from the state’s biggest money managers on adaptation investments in this area over the coming months.
GEF In! Global Environment Facility Earmarks US$200mn for Adaptation
Last week, the governing body for a family of climate and nature funds signed off on around US$1bn of investments, about a fifth of which will go toward adaptation projects in the developing world.
The Global Environment Facility (GEF) allocated US$203mn to Least Developed Countries, Small Island Developing States, and other regions desperately in need of capital to adapt their economies to growing climate shocks. Among the projects approved are a program to enhance the climate resilience of farmers in Burkina Faso, nature-based solutions across Burundi’s coastline, and early warning systems and land restoration in the Dominican Republic.
In total the adaptation work program will support 16 Least Developed Countries and eight Small Island Developing States, and aims to improve the resilience of more than 4.2 million people.
While US$203mn is nothing to sniff at, it pales in comparison to the size of the adaptation financing gap, which the UN pegged at 10-18 times the amount of current international flows for developing countries.
The GEF is a strange beast. It manages funds established by the UN Framework Convention on Climate Change (UNFCCC), specifically the Least Developed Countries Fund (LDCF) and Special Climate Change Fund (SCCF), which were set up to meet developing countries’ resilience and adaptation needs. It also serves as the “financial mechanism” for non-climate funds furnished by donor capital, including those committed to biodiversity, fighting pollutants, and managing risks related to mercury.
Moreover, it acts as a kind of aggregator of best practices and think-tank on impact finance through its Independent Evaluation Office. The GEF engages with the private sector to draw in financing for its primary causes and catalyze innovation in financial instruments, too.
Its responsibilities are sprawling further this year, as it assumes the mantle of Council for the new Global Biodiversity Framework Fund, which was established to support the goals of the Kunming-Montreal Global Biodiversity Framework adopted in 2022.
US Wildfires Risk Creating Insurance Deserts
Uninsurable climate risks have the potential to radically reshape markets for land, housing, and property development.
Insurance broker and consultancy Aon, in its recent Climate and Catastrophe Insight, reports that only 40% of weather and climate-related losses were covered by insurance last year, which means billions of dollars of damages were inflicted without recompense from the private sector.
This percentage is set to shrink further — and not just in the developing world. In the US, escalating wildfire risks are continuing to spook insurers. A report out of the Congressional Joint Economic Committee last year claimed that the economic damage from US wildfires ranges between US$394bn and US$893bn annually. Of this amount, around US$147.5bn is estimated to relate to property damage. You can see why insurers are getting flighty.
Wildfire-induced insurance cancellations for homeowners are already a commonplace story in California and Colorado. Residents of New Mexico are also seeing some carriers withdraw from particularly risky regions.
However, an article in Utility Dive (which is well worth your time) shows that insurers’ concerns go well beyond home insurance. Wildfire-related litigation costs can cripple power companies — just ask PG&E — and are making insurers reluctant to provide certain types of coverage, like wildfire liability. Countering this trend may be tough, given the uncertainty around how energy infrastructure will behave when subjected to extreme weather, and also as technology makes it easier to assign blame for specific conflagrations.
On the flipside, technology may also help sharpen insurers’ ability to monitor and respond to wildfire risks. Advanced modeling techniques that factor in the climate risk management measures taken by utilities can help insurers adjust premiums. For example, a utility that cuts back vegetation near its power lines may qualify for a premium reduction.
Similarly, financial innovations like parametric insurance could make insurance more affordable for hard-pressed utilities. Policies could be designed to only kick in once a wildfire spreads to a certain area, or only once a certain number of acres have gone up in smoke. Refining these products also depends on improved technology, like remote observation and geospatial monitoring.
This in turn provides opportunities for technology firms working on these kinds of tools to get a hold of funding. After all, utilities — and investors in utilities — don’t want to pay overboard for insurance. If they can invest a little in insurtech today to save a lot tomorrow in premiums, that’s a trade well worth making.
💡Innovation of the Week💡
Climate risks don’t only threaten power utilities; water utilities are exposed to them too.
The US Environmental Protection Agency (EPA) is in no mood to let these risks go unchallenged. It created a Climate Resilience Evaluation and Awareness Tool (CREAT) to surface information on climate risks to drinking water, wastewater, and stormwater utility owners and operators. Its ultimate goal is to raise awareness of climate risks across this critical sector, and help owners and operators select and justify investments in climate adaptation.
The tool is organized across five modules: climate awareness, scenario development, consequences and assets, adaptation planning, and risk assessment. By moving through these modules sequentially, users should be able to understand the economic consequences of specific climate risks to specific assets, and define adaptation plans to ameliorate their potential impacts. On completion of each module, users can generate interim reports to document their progress and communicate the findings to internal and external stakeholders.
CREAT is part of the EPA’s comprehensive Creating Resilient Water Utilities (CRWU) initiative, which is intended to harden water utilities against natural disasters and future climate shocks. To help share best practices, the agency has collated case studies from across the country, which contain helpful insights into how utilities are applying the EPA’s tools and guidance.