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US, UK Public Investment in the Headlines, Asset Manager Embraces Adaptation Theme, and More
US Inflation Reduction Act funds flow to climate data, with finance and reinsurance entities poised to benefit
Louie Woodall
January 29, 2024
AI-generated via DALL-E
The US government rolls out US$85mn for climate-resilience focused Industry Proving Ground program, academics slam the UK’s approach to public investment, QBE North America uses a donor-advised fund to pursue climate solutions, WHEB asset management establishes climate adaptation theme, five principles for effective nature-based solutions, and Wagga Wagga hosts the Innovation of the Week.
US Pours Dollars into Climate Resilience Innovation
President Biden’s landmark Inflation Reduction Act (IRA) earmarked some US$391bn for climate spending. While the legislation was signed in 2022, many of the investments and tax benefits it authorized are still in train. This is just the way it is with gargantuan federal spending projects.
However, last week an important check was cleared for US climate resilience spending. On January 23, the Department of Commerce (DOC) and National Oceanic and Atmosphere Administration (NOAA) announced that US$85mn of IRA funding is going to the Industry Proving Grounds (IPG) program, an initiative dedicated to filling climate data gaps and creating funky new data tools that help the finance and reinsurance, retail, and architecture and engineering industries build up their climate adaptation knowledge.
NOAA’s National Centers for Environmental Information (NCEI) will steer the IPG, with a promise to develop “more relevant data products” for the three abovementioned sectors. One planned output is tooling that improves our understanding of hailstorms, which cause US$15bn of damage to the US each year. The program also wants to refine catastrophe modeling and risks assessment for the insurance sector.
In addition, NCEI has pledged to update its data and information network, using cutting-edge tools including cloud-based systems and – you guessed it – artificial intelligence to deliver “user-friendly climate data.”
Total IRA spending on energy and climate (US$bn)
What’s particularly noteworthy about the IPG program is its ambitions beyond NOAA. The funding announcement says the NCEI is teaming up with the Department of Defense and National Science Foundation, and that IPG financing will be channeled to support US companies that are building extreme weather forecasting tools. NOAA is also examining how its climate data and technologies can be used by the private sector, with the intent of somehow or other transferring its innovations to commercial applications.
This is aligned with the IRA’s theory of change, which is to give the private sector irresistible incentives to develop climate solutions at scale. The data and technologies birthed by the IPG could end up fueling a new wave of climate adaptation and resilience startups, and enhance the capabilities of industry incumbents.
Spend £26bn a year for a sustainable, climate-resilient economy, UK told
Across the Pond, the climate finance landscape is gloomier. In November last year, the UK’s finance minister laid out plans that would see capital spending by government departments fall over time, contradicting cross-country analysis that public investment needs to increase considerably.
This prompted vocal opposition. Last week, academics slammed UK investment as “too little, too volatile and insufficiently forward-looking” in a new report, arguing that some £26bn (US$33bn) of capital spending is needed each year to build a flourishing, sustainable economy. Not only would this better equip the county for a future oriented around digitization and AI, it would also rouse the country out of the growth and productivity doldrums.
Twenty-six billion is a big number, equivalent to 1% of UK GDP. But the academics say the amount is justified as it’ll “crowd in” private investment and put the UK’s public finances on a healthier trajectory in the long run.
But it’s not only the amount of investment — how it’s spent matters, too. The report says climate resilient investments are vital given the UK’s exposure to climate impacts, which range from rising sea levels to brutal heat waves.
Without adaptation and increasing resilience to these impacts, the UK economy will suffer growing loss and damage. It is essential, therefore, that investments are climate-resilient. In many cases this will just mean redirecting investment so that it takes the growing impacts of climate change into account. Additional investment will be needed, but this will be far less than the costs of dealing with loss and damage.
This doesn’t mean reinventing the wheel. In many cases, investments need to be redirected rather than rethought, the report says. This is especially the case when it comes to investing in zero-emissions infrastructure and technology. For example, low-carbon home heating systems to deal with cold weather in winter should be complimented with improved ventilation and “passive cooling” to handle hot weather in summer. After all, an overreliance on air conditioning in sweltering temperatures could put stress on the grid, raising the specter of price spikes and, in the worst case, blackouts.
While the report doesn’t put a number on the amount of investment that should be ploughed into climate resilience and adaptation specifically, it cites other studies that peg the cost at 1-2% of GDP by 2050. That amount should be lower if more public investment is made today. Indeed, the main thrust of the report is that “targeted and temporary borrowing” is a money saver over the long-term, and a net benefit to the UK’s living standards and economic competitiveness.
The “invest to grow” mantra is a perennial favor across the social democratic left. Similar calls were made in the immediate aftermath of the 2008 global financial crisis. Today, it’s challenged somewhat by prevailing high interest rates and the current size of the developed world’s debt pile in the wake of Covid-19 – issues that the authors strive to address.
What’s interesting about the report, though, is its framing of public investment as a facilitator of private capital. It even states: “the market remains the most efficient way to distribute scarce resources in any economy and drive innovation in their use.” Old school state socialism this is not. In fact, the authors look approvingly on the US Inflation Reduction Act as an effective mobilizer of private investment in the climate change fight.
With UK elections slated for this year — and a change of government likely if current polls are to be believed — this report could be used by an incoming Labour government to build the case for sustainable, climate resilient investment. How Labour leaders articulate their proposed investment policy in the coming months should provide an indication of just how far they'll take its precepts.
Donor-advised Funds in the Spotlight
Public sector investments in climate adaptation solutions weren’t the only sort to hog headlines last week. QBE North America, part of the giant Australia-based insurance group, made a splash with the launch of its QBE Possibilities Fund on January 24.
The fund intends to mobilize capital garnered from philanthropies and strategic partners toward “early-stage climate change solutions” that have the potential to improve “climate resilience and stability.”
While the fund’s capitalization wasn’t stated in the press release, QBE says it has already made its first investments — in Azolla Ventures and ReGen Ventures. Azolla, a blended capital fund catalyzed by Prime Coalition, zeroes in on early-stage companies with the potential to drive large scale decarbonization. Meanwhile ReGen Ventures channels finance into regenerative technologies that cultivate advancements in food, agriculture, materials, and decarbonization.
Of note is the partner QBE North America selected to mobilize this finance: ImpactAssets, a US-based “donor-advised fund.” This is a “charitable giving vehicle”, meaning donors — whether individuals, corporations, or family offices — are giving assets away, rather than investing them in the traditional sense. While the donor, in this case QBE North America, can advise ImpactAssets on what kinds of projects it wants to support, ultimately the insurer contracts out the disbursement process to the fund.
This model makes sense for large corporations that want to support climate solutions but don’t want all the administrative and due diligence hassles that characterize the process. It’s a niche that appears to be working for ImpactAssets, which says its assets under management stand at US$3bn, triple the amount in 2022.
I’ll be curious to see what other corporate players take this route, and to what degree donors are looking to donor-advised funds to handle climate adaptation spending in particular. As we know, these investments are typically less remunerative than their cousins in the mitigation space, making the donor/philanthropic approach a way for companies to ease into the space free from the pressure of having to make competitive returns.
UK Asset Manager Eyes Climate Adaptation Theme
Trailblazing UK-based asset manager WHEB (for ‘Wylie Heyworth Environment Business’ after its two founders Dr. Rob Wylie and Kim Heyworth) is pioneering climate adaptation as a distinct investment theme this year.
In a January 24 blog, Claire Jervis, associate fund manager, said establishing the theme “creates opportunities for new companies to enter our investment universe,” like Advanced Drainage Systems (ADS), a provider of specialist water management solutions.
However, WHEB insists that establishing the theme is more a continuation of its current strategy, rather than an abrupt pivot. The blog says that WHEB already has 5% of its global fund invested in companies supporting climate adaptation.
Importantly, this new sub-theme changes nothing about how our strategy is managed. In fact, we have been investing in adaptation for years. Rather, it formally acknowledges the crucial role of adaptation investment.
WHEB’s announcement is indicative of climate adaptation’s growing salience among governments, institutional investors, and concerned individuals. Last year, JP Morgan Asset Management released a series of white papers on adaptation investment, and Wellington Asset Management is promoting climate adaptation as a “meaningful investment opportunity.”
With the momentum behind climate adaptation generated by COP28 and rising awareness of the scale of the climate adaptation financing gap, it’s likely that many more climate-forward asset managers will dive into the space this year — responding in part to increased demand from asset owners concerned about climate impacts eroding the value of their portfolios.
Climate adaptation being such an amorphous investment category, however, a wide range of investment approaches will be tried — some effective, others less so. I’ll be keeping an eye on the strategies rolled out by both the big names and the small fry to sort out which is which.
Five Principles for Effective Nature-based Solutions
Last week, Climate Proof highlighted issues around scaling nature-based solutions (NbS) for climate adaptation. It turns out lots of folk are beavering away on this issue. For example, here’s a helpful paper on how the European Union’s Sustainable Taxonomy could be leveraged to funnel capital into urban NbS, which is well worth your time.
One major barrier to the scaling up on NbS is the devilish issue of categorization. In other words, what makes an NbS an NbS? An article published last week in Nature Communications attempts to provide an answer. Written by experts from The Nature Conservancy, Conservation International, Nature United, and other advocacy groups, the paper outlines five key principles that distinguish an effective NbS:
Foundational Principles of Natural Climate Solutions
The solution preserves or restores an ecosystem through human stewardship.
The solution sustains biodiversity and natural climate adaptation services.
The solution is “climate additional”, meaning it provides climate benefits that otherwise would not exist.
The solution has a measurable impact. It has to be possible to quantify the climate mitigation effects of the NbS.
The solution must be equitable, respecting the rights, knowledge, culture and livelihoods of Indigenous peoples and local communities.
It’s the kind of schema that could inform or enhance investment taxonomies for climate adaptation, and ensure institutional and public investors direct capital into effective NbS.
This may be what the authors had in mind. The principles can be applied no matter where an NbS is located or who it is implemented by, and are simple enough for new entrants into the space to understand. The authors also acknowledge that “real-world complexities” mean the principles should evolve over time.
Let’s see if public and private entities take note of the principles as they scale their NbS activities. Embracing them may help investors avoid allegations of greenwashing and reduce the reputational risks that often come with wading into ecosystems traditionally stewarded by Indigenous peoples.
💡Innovation of the Week💡
Wagga Wagga is Australia’s King of Cool.
That’s an odd sentence — let’s provide some context. Wagga Wagga is a city in New South Wales, Australia. Last month, the city council won a local government ‘Excellence in the Environment’ award for its ‘Urban Cooling Strategy 2022-2052.’ The strategy is key to the city’s overarching adaptation plan, which is focused on dealing with extreme heat. This is a place where summer temperatures regularly exceed 32°C (90°F), after all.
Key to the strategy are “urban cooling tools”, including an “Action Summary Table”, which lays out the different ways in which residents can help reduce the impact of higher temperatures and heat waves on the community.
Wagga Wagga also released an ”Urban Heat & Canopy Map” which displays thermal land surface temperature and vegetation height classes — data that can be used to direct community resources to those areas most in need of cooling. The municipality used ArborCarbon, an environmental consultancy, to help construct the map using remotely sensed data. The company’s unique camera system is able to determine baseline canopy cover. Its findings are then processed so that users can identify urban heat hotspots.
Wagga Wagga’s award win is testament to the importance of actionable data to building smart climate adaptation plans. Mapping tools, based on credible data, can help zero in on those areas that most need support to combat climate impacts, allowing for a more efficient allocation of adaptation dollars.