A guide to private sector investment in coastal resilience

By Tibor Vegh, Associate Advisor - Oceans, Un Climate Change High-Level Champions; Senior Policy Associate, Duke University & Ignace Beguin, Ocean Lead, UN Climate Change High-Level Champions | June 6, 2022

Coastal resilience is the ability of a coastal community to bounce back after hazardous events such as storms; and, more narrowly, the protection of people and property provided by natural infrastructure such as mangroves or coral reefs.

Based on the latest scientific reports that discuss interconnected and multi-dimensional risk, we believe that while some economic sectors might have a more direct risk reduction benefit than others from investing in coastal resilience, all private sector actors can mitigate certain types of risk they are now facing, or will be facing in the near future.

Coastal Resilience as part of risk mitigation

The 2022 IPCC peport states that worldwide climate resilient development action, based in part on safeguarding biodiversity and ecosystems, is more urgent than previously assessed.

According to the IPCC, climate resilient development is enabled when governments, civil society and the private sector make inclusive development choices that prioritize risk reduction, equity and justice. And when decision-making processes, finance and actions are integrated across governance levels, sectors and timeframes.

With a tenth of the world’s population and physical assets either living in or located at less than 10 meters above sea level, coastal cities and their economic assets are disproportionately affected by sea-level rise, and other climate-compounding climate- and ocean-driven impacts.

Against this backdrop of predicted impacts from sea-level rise, the future viability of entire sectors of the ocean economy are at risk from climate change, as ecosystems are degraded, coastal infrastructure faces increasing risks, and the safety of operations at sea deteriorates.

At the same time, as commercial uses of the ocean accelerate and climate change impacts worsen, marine ecosystems and the communities who depend on them face an unprecedented expansion in the extent, intensity, and diversity of these stressors, leading to cumulative pressures and the emergence of new interconnected biophysical, social, geopolitical and financial risks.

During the high tide the inhabitants of Ghoramara Island are fixing the fragile soil embankment to restrain the further land erosion and the high tide that inundates to the island that is rapidly disappearing due to the sea level rise.

Investing in coastal resilience

Nature-related risks matter to businesses due to impacts on markets, operations, supply chains, and customer base. Beyond the motivation for biosphere stewardship generally, and ocean stewardship specifically, the economic rationale for investing in coastal ecosystems is strong.

When restored and protected, coastal habitats are important natural buffers to sea-level rise and storm surges, playing an essential role in ensuring the resilience of coastal communities, and reducing coastal risks, around the world.

A business-as-usual trajectory entails great risk to our economies, with a cost potentially reaching up to US$8.4 trillion over the next 15 years. In the next 15 years damage is projected to increase to coastal real estate, ports, shipping, marine renewable energy and seafood as a result of climate change

Up to US$3.98 trillion is at risk to coastal infrastructure and almost US$3 trillion to global fisheries if no action is taken. However, healthy coral reefs, as part of a coastal resilience strategy, can reduce the annual expected damages from storms to human life and property by more than $4 billion.

Similarly, mangroves can prevent more than $65 billion in property damages and reduce flood risk to some 15 million people every year. According to the Global Commission on Adaptation, protecting and restoring mangroves globally, at a cost of less than $100 billion, could create $1 trillion in net benefits by 2030.

Risk reduction

To better manage environmental risks, asset owners and managers need to recognize the level of financial risk in ocean related investments, integrate nature risk into mainstream risk assessments, seek and pilot risk-based and science-led approaches to guide actions toward sustainable pathways, engage companies on their vulnerabilities to such risk and encourage transparency and public reporting so that nature risks can be better managed.

Investment in public goods—grey or green infrastructure, water quality, or biodiversity, among many others—is typically limited to governments because amounts invested cannot be recovered through access fees charged to beneficiaries.

Coastal resilience is a public good, and investments in the large-scale restoration and sustainable management of natural assets for coastal protection has not been done by private entities due to lack of sufficient incentives. However, thanks to better communication of the benefits the ocean and coasts provide to people and increasing recognition among private economic actors as environmental stewards, this trend is poised to change. We are just now starting to see the first marketable products that use natural infrastructure for coastal resilience emerge and can be invested in.

In the Anthropocene, complex systems, such as those involving the ocean ecosystems, economy, and coastal populations collectively face an interlinked and diverse set of risks including operational, social, financial, and reputational risks., Due to the complex nature of these risks, the private sector has not only an economic, but a financial stake in investing in coastal resilience, regardless of industry. Also, more recently there have been growing action for financial disclosure on climate related risks making this a business imperative.

A resident slowly makes his way through the inundated streets of the village due to rising sea levels. Sayung subdistrict, Demak, Central Java, Indonesia.

Three avenues to invest: Private, Public-Private, Insurance

There are a growing number of frameworks and tools to help identify, develop, and scale sustainable opportunities that build coastal resilience. These opportunities can be employed in three investment avenues, depending on a multitude of factors including scale, investment potential, and potential or projected financial returns.

The private sector

The private sector can directly invest where they have a specific risk to address such as risk to a coastally located business interest or asset. New investment opportunities are emerging including concessional financing and blended finance opportunities that enable investors to invest into projects. When partnering on coastal resilience projects, financial institutions could adjust cost of capital available for the private sector by adjusting premiums depending on whether the proposed investment includes nature-based solutions and how this increases resilience. The emerging blue carbon market—which businesses are now looking at to offset some of their emissions—is also opportunity to attract finance for the restoration and protection of coastal marine ecosystems.

Public-Private Partnerships

To invest in coastal resilience and infrastructure, the private sector in some cases needs to partner with landowners along the coastlines where resilience investments are needed at large scales. There are several ways to form these alliances including through public-private partnerships but these approaches employ cost- and benefit-sharing mechanisms for the partnership to be mutually beneficial to all parties involved.

Insurance

If the insurance industry understands and properly values the risk reduction from natural coastal infrastructure investments, then it could reflect the economic benefits of reduced risks due to increased resilience. Within the context of insurance, capturing the value of natural infrastructure and the services it provides can happen in at least three ways., First, an investment, perhaps by a financial institution, could finance the construction of natural infrastructure which could then result in lower insurance premiums. Second, financial institutions could require investees or borrowers to take out nature-based insurance. Third, a relatively new approach, parametric insurance can be used to accelerate the payouts following a coastal storm or other event that leads to damages. Parametric insurance is a type of cover that pays out a pre-agreed amount to a policyholder according to pre-defined event characteristics or parameters, for example, peak storm wind speed for a given area.

Examples in action

Investment to enhance resilience can be directed towards natural infrastructure directly, into the development of novel insurance products that incorporate the value of resilience investments, or into companies that specialize in building resilience or measuring the direct impact of resilience investments.

Ocean Risk and Resilience Action Alliance

ORRAA pioneers innovative finance products that drive investment in marine and coastal natural capital, reduce ocean and climate risks, and build resilience in coastal communities. The private sector can help ORRAA build risk-adjusted, innovative and scalable products that change the risk perceptions of investing in coastal natural capital and increase resilience while delivering a return on investment.

Global Fund for Coral Reefs  

The GFCR is a 10-year, $625 million blended finance vehicle established through a coalition between United Nations agencies, financial institutions, and private philanthropy sources. The GFCR supports business models that can sustainably finance key conservation and development goals for coral reefs via two initiative windows. Technical assistance, capacity development, monitoring, and evaluation are provided via the grant window, while the investment window generates de-risked investment capital to maximize the impact of projects incubated by the grant window.

Blue Carbon Buyers Alliance  

The currently forming BCBA will serve as the “buyers voice” in the growing blue carbon community of practice in order to help scale blue carbon markets to conserve and restore coastal ecosystems. The private sector can commit to purchase high quality blue carbon credits to send a strong demand signal in a nascent market.

Blue Natural Capital Financing Facility

The BNCFF supports the development of sound, investable Blue Natural Capital (BNC) projects with clear ecosystem service benefits, based on multiple income streams and appropriate risk-return profiles. Through the BNCFF, private investment can result in actual impact on the ground.

Development of Insurance Products 

AXA Climate’s focus on novel insurance products build on risk valuation to combine resilience and adaptation investments and insurance. Through collaborations around developing new insurance schemes for coastal communities, investment can indirectly reduce costs associated with hazards or hazard risk by adjusting insurance premiums or providing capital to rebuild after a disaster.

Companies Building Coastal Resilience 

Using Wood’s ResilienceLensTM can unlock the resilience dividend as a return on investment in coastal resilience projects. The tool is an interactive web-based screening tool to measure the resilience value of projects, identify requirements and outputs that projects need to incorporate to adapt to shocks and stresses, deliver reliable performance, generate co-benefits to communities, and accelerate implementation of projects to build back better. Project financiers and investment institutions, as well as city leaders, whose primary interest is the identification of viable and bankable projects to enhance urban resilience, can also leverage and apply the ResilienceLensTM screen to their project portfolios.

Authors: Tibor Vegh (Associate Advisor – Oceans, High Level Climate Champions; Senior Policy Associate – Duke University), Ignace Beguin (Ocean Lead – High Level Climate Champions)

Contributors: David Howlett (Race to Resilience), Maximilian Bucher (SYSTEMIQ), John Virdin (Duke University), Karen Sack and Jack Stuart (Ocean Risk and Resilience Action Alliance)

 

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