Climate Risks: Are We Ready?

By Dawn McGregor, Hongqiao Liu 13 January, 2015

Climate change is high on the global agenda but still facing major stumbling blocks. CWR's McGregor & Liu expand.

The climate change conversation is not a new one but with the recent monsoon floods along Malaysia’s east coast estimated to cost more than USD560 million in rebuilding, it appears we are not as ready as we should be. High level talks are however happening, like the noteable China-US climate agreement at the end of of 2014 in which China pledged to reach peak carbon emissions around 2030 and the US pledged to cut its emissions by 26–28 % of its 2005 levels by 2025. Other climate discussions (which we attended) in the last quarter of 2014 include two conferences in Hong Kong (IFC’s Climate Business Forum in October and the International Conference on Climate Change (ICCC) in November), the 4^th Asia Pacific Climate Change Adaptation Forum in October in Kuala Lumpur and of course the UN Framework Convention on Climate Change (UNFCCC) or ‘COP 20’ in December in Peru.

Despite the many conferences, major stumbling blocks remain. Here are our 3 key takeaways from these conferences:

1. Uncertainty around climate change needs to be more bite-size & actionable

Two main obstacles hinder more action on climate resilience. First, the mammoth size of climate change (the latest Intergovernmental Report on Climate Change report, AR5, is hundreds of pages comprising four separate sections and 831 experts). Secondly, the uncertainty of climate science.

That said, climate science is improving and uncertainty decreasing but more needs to be done. Nevertheless, both need to be made more bite-size so that more stakeholders understand the issues and can take action. This is especially true if we want more private sector involvement as mitigating risk (uncertainty) is a fundamental aspect of business operations.

The Munich Climate Insurance Initiative aims to … “make sure vulnerable people have the tool at hand to manage climate risk and avoid poverty due to climate disasters”

Dr. Koko Warner, Executive Director of MCII

An example of this approach is the Climate Risk Tool developed by PricewaterhouseCoopers for Hong Kong’s Business Environment Council.  The excel-based tool uses climate science to help inform businesses on their climate risks by identifying, assessing & prioritizing their risks. The results can then be fed into the company’s own enterprise risk management strategy.

Another private sector innovation is the Munich Climate Insurance Initiative (MCII), a commercial climate insurance pilot in the Caribbean. Unlike the Climate Risk Tool, which is targeted at businesses, MCII targets the public.

It is action-orientated as it allows low-income families in the region to insure their livelihood at minimum cost of around four to six lunches. It aims to “make sure vulnerable people have the tool at hand to manage climate risk and avoid poverty due to climate disasters”, said Dr. Koko Warner, Executive Director of MCII.

These tools work because they are not only bite-size and actionable but are tailored to specific audiences

These tools work because they are not only bite-size and actionable but are tailored to specific audiences.

More of these tools please – be they for corporates, governments or the public either locally, nationally and/or globally. See how PepsiCo and Columbia University are exploring using climate forecasts in supply chains.

2. Legacy systems hamper comprehensive solutions required for climate resilience

How well are ‘we’ doing in becoming climate resilient? Well, if we take ‘we’ as Hong Kong apparently “quite well” according to the Hong Kong government at the ICCC gathering in November. But are we really?

Hong Kong is doing “quite well” but its climate resiliency actions need to go regional to ensure water & food security, both largely supplied by mainland China

It was clear from the conference that Hong Kong is climate active with various projects requiring collaborations between different government departments such as the drainage and storage of storm surge waters to prevent flooding and slope resiliency to prevent landslides.

However, all these projects are Hong Kong centric and some experts questioned this approach given that basic livelihood essentials such as food and water are largely supplied by mainland China.

When we think about climate resilience should we not also be thinking about the resilience of our water & food sources? Should the city’s climate resiliency plans therefore include the Pearl River Delta?

Obviously, the answer is ‘yes’ but it’s easier said than done. To start with, water is not managed by a single government department but several. This means there needs to be inter-departmental work.  In Hong Kong there are four such departments and in China there are nine (known as the “nine dragons”). China is trying to reform its water management from “mountain top to the ocean” to provide a more holistic management of water – no easy task. There is no such movement in Hong Kong.

Disparate resposibilities for water across government departments,  legacy systems & lack of financing all hinder regional resiliency

On top of the bureaucracy of various departments,  there are also legacy infrastructure/system issues. Many of these set-up in the past, have not been modernized to deal with current day risks such as climate change. It is hard to change these systems. Significant climate events such as earthquakes and hurricanes are instigating change in this direction but surely we shouldn’t wait for such events to happen to make changes?

With fewer legacy systems/infrastructure and current technology advances, Asia should be able to leapfrog and lead the way in regional resiliency plans but then there is the question of money.

Securing funding for climate projects is not easy. Similarly to changing legacy systems, raising funds for this is easier after a climate disaster. For example, New York City following Hurricane Sandy in 2012 now has an USD19.2 billion response fund. However, this amount is only around 40% of the total cost of disaster from Hurricane Sandy, which was USD50 billion. This shows that we are not making the right risk return decisions for amounts invested and not doing it early enough.  More on this in point three.

Significant climate events like floods & earthquakes accelerate changing legacy systems but we can’t sit around and wait for one

Regional resiliency plans aren’t just for governments but also corporates. As time passes climate change will only increase pressure on resources and paying more may not guarantee the future supply of water. Corporates will need to consider not just access to water but the sustainability of the watershed sources and common stakeholders – more on this from Deloitte Consulting’s, Director & Practice Leader of Enterprise Water Strategy, Will Sarni.

Climate resiliency is costly & with limited funding we need to be strategic in our spending. For example desalination, whilst a freshwater solution is not only expensive but energy intensive and therefore “climate unfriendly” as WRI shows.

So how much or should we even be investing in climate mitigation & adaptation?

3. It comes down to money: “climate mitigation” gets almost 6x more money than “climate adaptation”

“Climate resilience” is the capacity of an individual, community, or institution to dynamically and effectively respond to shifting climate impact circumstances while continuing to function at an acceptable level and to adapt (“adaptation”). To spend on “climate adaptation” means spending on actions that help human and natural systems to adjust to climate change. Spending money on “climate mitigation” means to spend on actions that limit the magnitude and/or rate of long-term climate change.

Today, climate adaptation is significantly under-financed with the majority of funds going towards climate mitigation.

According to a report from the World Resources Institute Open Climate Network, only 17% of the USD35 million “Fast-Start Finance” for the climate (agreed under the UNFCCC) from 2010-2012 raised by contributor countries went towards climate adaptation.

This imbalance in adaptation finance flows is prevalent across countries from Germany to Japan – see chart.

Under-financing of adaption is even more pronounced in developing countries and is only going to become more of an issue.

According to the report “Adaptation Gap Report” by the United Nations Environment Programme, the IPCC AR5 report’s global estimates of the costs of adaption in developing countries of between USD70 and USD100 million a year globally by 2050 are “likely to be a significant underestimate. At a minimum, the costs of adaptation are likely two-to-three times higher than the estimates reported thus far, and plausibly much higher than this towards 2050”. The report adds that if we fail to keep the global temperature rise below 2℃ this century costs will be even higher.

Only US$10.2bn has been mobilized out of the target of US$100bn p.a. for developing countries by 2020

Under the UN framework at COP 16 in 2010 developed countries agreed to raise USD100 billion per year for developing countries before 2020 as part of the “common but differentiated responsibilities” – known as the “Green Climate Fund”.

Progress has been slow. At COP 20 in 2014 it was announced that USD10.2 billion has been mobilized, far short of the target amount. No further roadmap to raising money has been agreed so far.

The finance sector is trying to drive money into climate resilience through green bonds (normal bonds of which the proceeds are used for climate or environmental projects). The Green Bonds market stood at USD35.8 billion outstanding on 10 June 2014, with issuance in 2013 (USD11 billion) and 2014 (USD18.3 billion) accounting for over 80% of the total outstanding.

Long way to go: Green Bonds raised US$18.3 bn in 2014

But there is an issue of how ‘green’ some green bonds really are – how accurate is it that proceeds are actually going to real climate or environmental projects. Accordingly, there are two kinds of green bonds in the market, ‘verified’ and ‘non-verified’. As climate funding is already low, if green bonds aren’t actually ‘green’ then we need even more money.

2015: Time to get ready…

We expect climate change to continue to rise on everyone’s agenda as the impacts of climate change can no longer be separated from the economy.

It’s a big year ahead with COP 21 in December 2015: climate funding is lagging, China announced its own climate fund; corporates have no excuse not to move to climate resilience
Let’s make the year count

Governments of UNFCCC member countries will early this year announce their Intended Nationally Determined Contributions (includes economy-wide emissions targets), ahead of COP 21 in December in Paris.

China announced at COP 20 that it would not be contributing to the Green Climate Fund but instead establish a separate fund, the “South-South Cooperation Fund” that it pledged USD20 million a year to. Plans for the fund are not finalised with uncertainty over how money will be raised, assessment criteria and time frames.

Meanwhile, China still has gaps in its own climate funding. See China Water Risk’s analysis on this in “Gaps in Rainy Day Funding”. 

As for corporates, with government’s making such commitments they have no excuse to not be moving to make their business operations climate ready. But data shows that there is a long way to go to achieve this as the action being taken by corporates on water related risks is not enough to match the risk.

All in all it appears we are not as ready as we should be. We have a year until COP 21, let’s make it count!

Further Reading

• China: Gaps in Rainy Day Funding – Given increasing economic losses & negative impacts on food production due to extreme weather, China Water Risk’s Hu highlights gaps in flood control investment and expands on how the Chinese government expects to finance rainy days ahead
• Using Climate Forecasts in Supply Chains – To prevent & mitigate losses caused by climate events, the Columbia Water Center is developing advanced climate forecast products. Paulina Concha expands on this and the Center’s pilot with PepsiCo for its Frito Lay business
• Water: Can’t Always Buy What You Need -With competition for water intensifying, paying more for water may not get you what you need. Deloitte Consulting’s Will Sarni on strategies that can help corporates secure water for growth
• Water Stewardship: Actions Must Match Risk – Despite media & corporate acknowledgement of water related risks 58% of companies in CDP’s 2014 Global Water report do not have a public commitment to water. China Water Risk’s Dawn McGregor expands on actions needed in China and globally to match the risk
• Desal: Too Much Power For Water – WRI’s Zhong, Hua & Genasci Smith share their analysis that show desalination alone cannot quench China’s thirst and investments in lower-cost less power hungry solutions such as water efficiency & wastewater reuse such be prioritized

Climate Change

• Water Risk & National Security – With the China’s largest surface freshwater reserves, the Qinghai-Tibet Plateau glaciers shrinking by 15% (an area equivalent to 11.5 “Singapores’), we review US military views on how climate change impacts national security & China’s current stance
• Hot & Hungry: Disaster Management – Even without global warming, competition for freshwater is becoming increasingly intense. Oxfam’s Magrath & Morris-Iveson on why local water resource management is key to disaster response & climate change adaptation at a community level
  
• AIDF Water Summit: 5 Takeaways – Dawn McGregor gives us her 5 takeaways from AIDF’s Asia Water Security Summit ranging from exposure of GDP to water risk to the crucial need for un-siloed approaches and key areas of improvement in the water sector

Corporates & Climate Change

• Business & Society: Building Trust – Given pressing societal issues, companies are now expected to lead the change across their business value chain. Edelman’s Ashley Hegland on why businesses need to reprioritize value to include such societal benefits to build & maintain trust or face reputational brand damage
  
• The Case for Company & Community Cooperation – Companies have experienced material adverse impact on profits because of a lack of cooperation on water with communities. Sustainalytics’ Dujardin says it’s time to start in the face of more droughts & floods