Launched at the UN Climate Action Summit in 2019 as a private sector-led initiative, the Coalition for Climate Resilient Investment’s objective, according to its website, is to develop solutions “to ensure all infrastructure investments incorporate physical climate risks and advance climate resilience”.

“What we’re doing as a coalition is that we are developing solutions connecting policy and private capital,” explains Carlos Sanchez, who holds dual roles as executive director of CCRI and director of climate resilience finance at one of the organisation’s convening partners, Willis Towers Watson.

The coalition has more than 120 members that include governments, pensions, asset managers, ratings agencies, multilaterals and technical institutions. It is divided into three working groups: the systemic resilience group, which helps governments assess and manage the exposure of social, economic and biodiversity value to physical climate risk; the asset design and structuring team, which helps investors and asset managers integrate physical climate risks in asset valuation processes; and the financial innovation group, which is tasked with creating financial instruments to mobilise capital towards resilient investments.

An example of CCRI’s work is the systemic resilience assessment tool developed by Oxford University with the support of the UK government and the Green Climate Fund, for the government of Jamaica. “We look at the country’s energy, transport and water networks and study the interdependency of the assets,” Sanchez explains. “We then take into consideration these sectors’ impact on the economic and social value. This way we come up not with the asset value at risk, but the national value at risk.”

According to Sanchez, there are investors and firms that are already taking steps to price in these risks: “We have members of the coalition who come to us and say: ‘It’s not that we don’t have the analytics to integrate. It’s not that we don’t recognise physical climate risk. It’s that we are penalised for it’.”

They are penalised by being shut out of competitive processes, having added the necessary capex to their models. “Such delta capex is not properly compensated in NPV terms, nor in terms of more likely cashflows, via either low cost of capital or other channels,” Sanchez explains. “For me, that’s a tragedy.”

Correction ahead

However, progress is being made, and this is leading Sanchez and CCRI to believe that within the next one to two years there will be a correction, with the system being better able to recognise exposure of cashflow.

“This means institutions, without necessarily suffering an impact, may see a correction in their asset prices,” he says. “Many coalition members see this as an opportunity to take action and position themselves ahead of it. “That is what’s really moving the discussion about resiliency from being perceived as something that is tedious, onerous and costly to something that is necessary for investing in the right way and positioning yourself in
the future.”

“You can be resilient and profitable but only in a world where you combine aggressive mitigation and a transition risk framework”

Speaking of the future, CCRI also spends time and energy on terminal value calculations to provide guidance to investors in terms of what they need to look out for.

One example is assessing insurance premiums and examining how they have evolved in recent years.

“We are seeing how insurance premiums are rising in locations such as Florida, which begs the question of the long-term availability of risk transfer solutions,” Sanchez says.

He highlights that insurance is innovating and improving its ability to guide and reward resilience, but not in isolation from other risk assessment and management solutions. He also points out that insurance is primarily focused on loss and damage – acute risk. “But financial materiality of physical climate risk can be derived from several other exposure channels,” he says. “It’s chronic risk too and it’s impact on depreciation or long-term revenue, among other things.”

And, of course, there is the element of time to consider.

“We’re really against the clock here,” Sanchez warns. “In terms of resiliency, we’re saying the time is now, for many reasons – the main one being to save humanity. But from a financial standpoint, the time is now because if we wait too long, we’ll just be looking to minimise losses rather than make a profit.

“Our message is: you can be resilient and profitable but only in a world where you combine aggressive mitigation and a transition risk framework.