Overcoming the Barriers to Implementing Resilience Standards

 

1200px-Bolivar15(Gilchrist_Slab)A few days ago, I started off a discussion on Resilience Design Standards and why they may be an important standard for both new and existing buildings to start considering. These standards are expected to help prepare buildings and infrastructure for natural disaster and man-made disaster. Discussion on resilience standards has been going on for a while and following resilience standards look to work. A well known 2005 study by the National Institute of Building Science titled Natural Hazard Mitigation Saves: An Independent Study to Assess the Future Savings from Mitigation Activities, found that for every $1 invested in hazard mitigation society saves $4. The push for a greater national focus on resilience standards came from President Obama’s 2016 proclamation for National Building Safety Month. With this proclamation was the creation of the US Army Corp of Engineers Building Resilience web site, a nice source to get started on learning more about resilience standards. Even with a growing discussion of the need to become more resilient, greater resources being provided, a multitude of standards available, there still does not seem to be a considerable amount of uptake, particularly in the commercial building space. According the findings of a 2017 Meister Consulting Group study, the “resilience standards market is still nascent, most of the standards are in pilot phases, or with their first customers.”

Identifying and implementing particular standards are expensive, both time and money. We have seen this with the growth of more climate mitigation focused green building standards such as LEED, Green Globes, IgCC, etc.  To follow and implement requirements for these standards has historically required a bit of premium on up-front costs. Today, in many cases building “green” is much more cost competitive and is largely expected in much of the industry. The actual certification can still be a bit pricey, however. However, the benefit of these standards are that if implemented appropriately and maintained, the building will have improved building operations and lower cost as compared to other standard buildings. Higher performance systems and better quality building practices will likely lower operating costs and emissions. Further, many of these standards are demanded in the market because they are known to result in higher quality operations and buildings. Much of the commercial market has shifted to much of the LEED standards due to the success LEED has had in improving building quality. Now LEED is dealing with this success and upping its game a bit, i.e. the dynamic LEED plaque. The discussion on the evolution of LEED and green building is a whole other blog post. The point here is that the green building standards have largely been shown to have a positive economic impact on a building through lower operating costs, improved building comfort, lower emissions, etc. all resulting in higher demand in the market.

Unfortunately, the resilience standards have not made the ROI connection. I would argue the primary reason is that resilience standards are preparing a building for something that is uncertain. By following these standards the building owner does not know when the payoff will occur. We know the “put your extreme weather event here” is coming, but when, what will be the magnitude and how often will it occur? As a building owner and operator, I know my investment in green building standards like LEED will have a payback in X number of years. For resilience standards, I am less certain of this and therefore less willing to to invest as heavily in these standards.

 

How do we improve the uptake of these standards? It really is not a question of should we start promoting these standards. The trend is in the positive direction for more extreme weather events.

munichre storm events
MunichRe Report on Loss Events

One of the key stakeholders are insurance and reinsurance companies.  They have a significant stake in the robustness and resilience of our built environment. The role for these companies is to potentially provide discounts to building owners to build to resilience standards. The Meister report had a good example of the FORTIFIED program that provides an example of how insurance companies may provide discounts and or state’s provide tax incentives if standards are followed. It would also be in the interest of financial institutions to push a bit more for resilience standards. These organizations are financing, buying and selling properties for long-periods of time that would see significant less risk if resilience standards are met. There are some underwriting standards that are being developed or are in early stages such as SuRe Standard and the RELi Resilience Action List.

An option to potentially lower the cost of these standards, and to improve understanding of how they work, is local and state governments leading by example. Much of these facilities are seen as critical infrastructure and should already have some level of resilience built into them. If governments begin to design and build to specific resilience standards, the entire design, construction and financing sectors will better understand how to effectively implement and pay for these improvements. A great local example for Houston was Mayor Bill White’s Green Building Resolution (GBR) in 2004. For the GBR, the City of Houston took the lead in bringing LEED to the entire City of Houston.  There was no mandate, only capacity and knowledge building of the market which has resulted in Houston being a leader in meeting green building standards. Maybe the City of Houston should again take a leadership position and help to build the resilience standards market, as well.

Additional Information from the Meister Report. A rather comprehensive list of resilience standards. 

 

 

 

 Alliance for National and Community Resilience (ANCR). A nonprofit formed by the International Code Council with partners from the nonprofit and private sectors, ANCR is currently designing the Community Resilience Benchmarks system, a rating system for community resilience.

 Building Resilience—Los Angeles (BRLA). Developed by the US Green Building Council–Los Angeles, BRLA seeks to strengthen community resilience by positioning facilities preparedness in the context of resilience for the broader community. BRLA staff have started to deliver trainings, but benchmarking standards are still in development.

 Building Resilience Rating Tool (BRRT). The BRRT was created by the Insurance Council of Australia as a simplified version of insurance company hazard rating tools. Currently in beta testing, the tool provides a baseline assessment of risk from natural hazards faced by residential homes.

 Community resilience assessment methodology (CRAM). Developed by the National Institute of Standards and Technology, CRAM was designed to assess infrastructure preparedness to better understand overall community resilience. The methodology is currently in draft form.

 Enterprise Green Communities. The Enterprise Green Communities certification program is administered by Enterprise Community Partners, a lender to affordable housing projects, and is designed for new and existing affordable housing facilities. While focused primarily on green building design, the certification criteria incorporate resilient design components and are complemented by the Ready to Respond Toolkit. Both the certification program and the toolkit are available in the market.

 Envision. Developed by the Institute for Sustainable Infrastructure and the Zofnass Program for Sustainable Infrastructure at Harvard, Envision is designed to measure the sustainability of public works projects, with resilience as a key consideration. Envision is available in the market.

 FORTIFIED. The FORTIFIED standards are designed to build resilience to hurricanes, high winds, and hail, and can be applied to business, commercial, and residential properties. They were developed by the Insurance Institute for Business and Home Safety. FORTIFIED is available in the market.

 Interagency Concept for Community Resilience (ICCR). In 2016, the Mitigation Framework Leadership Group, an interagency working group co-led by the Federal Emergency Management Agency and the National Oceanic and Atmospheric Administration, released a draft of indicators identifying national-level measures that contribute to community resilience.

 LEED pilot credits. The LEED pilot credits on resilient design aim to build resilience at the facility level through the identification of hazards and the development of emergency preparedness procedures. They are designed to be pursued in conjunction with the LEED certification process.

The pilot credits are currently available through the Building Design and Construction rating system.

 Performance Excellence in Electricity Renewal (PEER). Developed by the Electric Power Research Institute and Motorola, the PEER standard addresses the reliability and resilience of electrical infrastructure. The standard is available in the market.

 Resiliency Action List (RELi). RELi was developed by the Capital Markets Partnership and the C3 Living Design Project in conjunction with Perkins+Will and several other collaborators as a national consensus standard. It aims to increase adaptability and reduce sensitivity to hazards for building occupants. RELi is currently being piloted by several facilities.

 Resilience-based Earthquake Design Initiative (REDi). The REDi rating system was developed by Arup as a standard for addressing seismic hazards. REDi is available in the market.

 Sustainable Sites Initiative (SITES). Administered by Green Business Certification, Inc., SITES is designed to build resilience by strengthening the ecosystem services of landscapes. SITES is available in the market.

 Unified Facilities Criteria (UFC). UFC was developed by the U.S. Department of Defense. The criteria incorporate sustainability principles and considerations for resilience to natural, climate-induced, and human-induced hazards. The criteria are used by U.S. military facilities.

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Resilience Design Standards – Another Option for Climate Adaptation

In the last few years, real estate property owners have started taking a closer look climate vulnerability of their properties and the cities where they conduct business. Grosvenor, one of the largest privately owned property business was curious enough to conduct their own study, titled “Grosvenor Report: Resilient Cities.” This study assesses the climate vulnerability and adaptability of the world’s 50 most important cities. Houston, in Grosvenor’s opinion, is one of those cities. For this study, an  adaptive capacity score and a vulnerability score was constructed. Cities were ranked based on how they score in each area. Unfortunately the City of Houston was not a top-performer. Overall it came in the top half, #22. Of the 11 US cities in the ranking, Houston came in last place, at #11.

most and least resilient city graph
Resilient Cities – Grosvenor Report

Further, the City and the State’s adaptive capacity is being tested on a more regular basis. NOAA’s Billion Dollar Weather and Climate Disaster study tells a rather alarming picture of how the state is being tested.

First, is the graphic that shows 6 very large weather events hitting the state in 2016.

Billion-Dollar Weather and Climate Disasters
NOAA – Billion-Dollar Weather and Climate Disasters

Second, we have a graph that shows the number of storms over several years. Most important to pay attention to is the black trend line.

TX Disasters
NOAA – Billion Dollar Climate Disasters

Finally, Texas is the reddest state and I am not talking politics. This map displays in a red gradient the number of billion dollar plus storm events over the time period 1980 to April 2017.

1980 2017 storm events NOAA
NOAA – Billion Dollar Climate Disasters

This is a problem. The cost of doing business in Houston and Texas in general are likely to see significant gains in the near term if trends continue. As mentioned in earlier posts, there is plenty evidence that it will. According to a 2014 ULI report, direct monetary losses as reported by reinsurance companies was over $150 billion in the last decade. It is anticipated that in some places monetary losses for buildings are likely to double which will increase insurance premiums and overall property operating costs. In many cases, real estate owners are looking to absorb these increasing premiums and allocate them out to tenants. This approach is not sustainable for the viability of the business or the community.

A potential solution, not a silver bullet, but part of the silver buckshot needed to deal with climate adaptation, is the adoption by cities of voluntary resilience standards. There are a lot of them and you can check them out in this 2017 Meister Consulting Report titled Voluntary Resilience Standards. The expectation of these standards is that by increasing the resilience of the built environment, the entire community’s resilience is improved. There are a very wide assortment of these standards dealing with new construction and remodels, different building sectors and resilience against certain natural disaster and man-made disaster events. Similar to what the City of Houston did with the LEED process in Houston during the Mayor White administration, it should consider leading by example with resilience standards, particularly since we are dealing largely with critical infrastructure.

Lack of Climate Risk Transparency a Problem for Gulf Coast

abandoned-house-2I wrote a post a couple of weeks ago on the Double Climate Risks faced by the Gulf Coast region. The climate risk of a quickly changing climate and the risk associated with a more climate aware market and consumer. It is expected that the Gulf Coast is likely to see significantly more extreme weather events due to climate change and with 70% of the Gulf Coast economy still tied to oil and gas, we may see some direct economic impacts as consumer preferences shift, particularly in a shift to electric vehicles and renewable energy. Today’s post is focused on the growing sense of shareholder risk that is being felt due to lack of transparency by oil and gas companies of their climate risk. Further, what is important to consider is that this lack of transparency is not only a problem for shareholders, it should also be seen as a problem for the entire Houston-Galveston Community. As shared earlier, our economy is still largely dependent on the oil and gas sector. If we are not made aware, or allowed to understand, the potential risks that some of our largest employers face, then we cannot properly plan and prepare for the future viability of our economy and community.

Oil and gas companies have likely known for a significant amount of time about the risks associated carbon emissions and climate change. They will model economic, regulatory and environment scenarios in regards to climate change and attempt to plan appropriately for the most likely event. Or, more likely, lobby extensively to maintain the status quo and reduce the likelihood of these economic and regulatory scenarios from coming about. We know this is occurring. The recent ExxonMobil flare-up is a good example of what may have been known and the efforts made to limit this reality. Exxon Mobil has been in the news lately largely due to its understanding of the risks associated with climate change back in the 1970s and its alleged lack of disclosure of this risk to shareholders. (ExxonMobil disputes this lack of transparency and the question is currently being decided in the courts.)

With this growing concern by shareholders, 2017 does seem to see a move toward greater transparency, albeit kicking and screaming. Much of the movement is occurring across the pond. Ten non-US headquartered oil and gas companies have created the Oil and Gas Climate Initiative to develop the appropriate strategies to ensure a more carbon friendly energy sector. Shell has been an early leader with a commitment to invest $1 billion per year in renewable energy by the year 2020 and ties its executives salary bonuses to greenhouse gas performance goals. Other companies getting on board have been Total and BP.

In the United States, Occidental Petroleum shocked many with the shareholder vote requiring the disclosure of carbon risk. Although the board was lobbying against the idea, major investors, including BlackRock and Calpers, secured the votes to make it a reality. ExxonMobil and Chevron both rejected climate disclosures resolutions in 2016 and look to do the same in 2017. That being said, in March of this year Chevron , in an SEC filing, explicitly warned shareholders of the material risk to the company due to climate change related regulations and lawsuits.  However, Chevron goes on to say in another report that it does not see any decrease in oil and gas consumption in the near to mid-term and so does not anticipate any material impact on its income due to climate change.

The fact of the matter is that with or without the United States, the world is changing. There is a movement toward to greater efficiency, deployment of renewable energy and storage technologies and electric vehicles. (Check out LLNL Energy Flow Chart to see where all of our petroleum goes.) A report by Carbon Tracker finds that $2.2 trillion of stranded fossil fuel assets are at risk, with the United States potentially seeing the greatest loss.  It is anticipated that this will occur as countries continue to work toward their Paris Agreement goals and as clean energy technologies become cost competitive.

The risk for shareholders and for communities, like Houston, is that the oil and gas companies, the economic engine for the region, are not actively adjusting through investment and portfolio diversification, or are aware of this shift, and due to short-term financial interests, are not willing to disclose the risk. Some level of climate risk transparency is necessary for good decision making and planning in our community, without it we continue with business as usual to our detriment.

 

 

Source: Carbon Tracker Report

Paying for More Resilient Infrastructure: Some Options Exist

 

Local and state goverWashita_River_June_2015_floodnments are quickly falling behind maintaining its critical infrastructure. Just check out the American Society of Civil Engineer’s Infrastructure Report Card to see how US infrastructure is not making the grade. One trillion dollars is needed in the next few years just to bring water infrastructure up to standards and meet growing demands. Unfortunately, climate change is adding more stressors to this infrastructure, making matters worse. With these growing infrastructure problems and increasing risk to climate change cities are over-exposed and under insured to climate risk. Fortunately, to help with this failing infrastructure, a variety of funding tools are becoming available including bond instruments such as green bonds, catastrophe bonds and resilience bonds, as well as innovative public private partnerships (P3).

Green bonds are similar to other infrastructure related bonds except that they must demonstrate some type of environmental/climate benefit, i.e a qualified green investment as defined by the Climate Bonds Standard Board. They are typically issued as a use of proceeds bond and are backed by the issuers balance sheet. They are able to fund a large variety of different adaptation/resilient related projects. The Green Bond market appears to be significant, about $100 trillion potential,  and is growing rapidly. To date, in 2017 over $35 billion has been issued and estimated to be about $150 billion by the end of the year. This is over develop the issuance of 2016.  appear to be gaining a good bit of traction.

Resilience bonds are bonds that allow issuers to build infrastructure to reduce loss or likelihood of loss during a natural disaster event. This can be coastal protection, sea walls, storm water mitigating green infrastructure, etc. They are typically coupled with catastrophe bonds. Cat bonds work as insurance instruments that payout when disaster strikes. Having the Cat bonds covers the city in case of a natural disaster, the resilience bond funded project lowers the overall natural disaster risk to the community, thereby lowering the premium paid for the Cat Bonds. Having this combination of resilience and Cat bonds are key for cities in a time when Federal Disaster dollars are constrained, insurance costs are rising and the number of natural disaster events are increasing. There have yet to be any resilience bonds issued but appear to be getting greater attention as the threat of climate change increases. The Cat bond market churns along separate from resilience bonds with about $1.7 billion issued in Q1 of 2017.

An issue remains, particularly for cities that already have significant debt obligations, as to whether they have the capacity to issue additional bonds, whether they are to improve community resilience or not.  The public private partnership (P3) is an option to fund some infrastructure projects that would be off-balance sheet. However, there needs to be an income stream for the private partner. A good fit for this approach could be the funding of combined heat and power (CHP) and District Energy systems for communities. CHP can significantly improve the resilience of  critical infrastructure. Very simply, the private organization would own and operate the plant and be paid by the City for these services. There are other ways to set up a P3, but this is the cleanest way to explain it. Essentially, the Community sees an improvement in its resilience by an off-balance sheet funding mechanism. Further, if structured appropriately, the deal would be paid for with operating dollars rather than capital dollars.

Options do exist for communities to invest in their infrastructure. Some communities understand the benefits of these funding instruments and are using them to make their communities more resilient.  Most of these projects are in transportation and water infrastructure projects and the communities are largely on the east and west coast. The third coast has yet to take it too seriously. Those that have not begun to realize the potential climate threat to their community and the common sense solutions available may want to begin to educate themselves on these funding opportunities and start taking action.

Funding Resilient Infrastructure: What are the Options?

I recently wrote a post on the double climate risk that the Texas Gulf Coast faces Gfp-texas-houston-bayou-river-in-the-cityregarding climate change. One of the primary concerns is the lack of local funds that are available to maintain existing infrastructure, much less develop more adaptive infrastructure.

However, there are a variety of options for the Gulf Coast to consider to help fund the development of more adaptive infrastructure, including grants, bonds, loans. etc. A helpful resource would be the US Climate Resilience Toolkit that lists a variety of resilience and adaptation funding opportunities. Another resources, although I am a bit hesitant to suggest it is the EPA’s Climate Change Adaptation Resource Center (ARC-X) . This site also provides a great deal of information of federal funding and technical assistance for communities to invest in adaptative infrastructure. It looks like this assistance and funding will stick around for the remainder of the year, with the continuing budget resolution, but may go away in the next budget cycle if the 31% cut to EPA’s budget happens as recommended by the GOP.

Other than these resources, a potential opportunity from FEMA is the National Mitigation Investment Strategy (NMIS). According to FEMA, the NMIS “provides an opportunity to be more intentional about setting resilience and mitigation investment priorities, and will increase the ability of Federal Departments and Agencies to plan and justify budgets and resources that invest in mitigation and resilience due to the amount of disaster loss reduction anticipated from these investments.”  The NMIS is currently taking comments and input from stakeholders. The Gulf Coast may want to think about how it can participate in guiding the development of this investment strategy. In line with this strategy, FEMA is also considering the Public Assistance Deductible. This is still under review, but if it does see the light of day, will require states to spend a specific amount on emergency preparedness and disaster costs. Once a state spends a predetermined amount, FEMA will provide funds to pay for a repair critical infrastructure damaged during a specific event. This really does not seem too feasible for states who are fiscally constrained, but FEMA is testing the idea in 2017.

A significant unknown, but a potential great opportunity for Cities is the mobilization of the capital markets to invest in more resilient infrastructure. There has been a some interest in public private partnerships (P3s), as well as resilience bonds and green bonds. There is a growing desire to help invest in new adaptive infrastructure, but within the United States has not gained a significant amount of traction. That being said, there are some options. A group called Wall Street without Walls is trying to drive a bit more interest from the capital markets and have largely been involved in economic development in low and moderate income communities. Another example, that other states may want to consider, is the Business Oregon state economic development agency and its Infrastructure Finance Authority (IFA). The IFA invests in critical infrastructure in communities across the state to improve resilience and sustainability. Future posts will further look into how the capital markets may be the best bet for cities to develop more resilient infrastructure.

Double the Climate Risk for City of Houston and Gulf Coast

1024px-Houston,_Texas_at_Night_2010-02-28_lrgWhen discussing climate change and the risk associated with it, the focus is typically on the impacts of extreme weather events, such as more intense flooding, hurricanes, extreme heat, drought, etc. There has been less focus on climate related impacts to a community, when the threat of climate change shifts our industry base and the way we do business. In communities that are focused on resource extraction, such as oil and gas, what are the impacts to this community when regulations and consumer preferences shift us away from the use of this resource? There has been recent examples of how the market shift from coal to natural gas has significantly impacted communities that are dependent on coal for economic sustainability. As electric power generation switched from coal to natural gas across the country, due to lower natural gas prices, coal communities have suffered.

We are now seeing similar shift in consumer and investor preferences that may have a similar impact on communities that rely on oil and gas for their livelihood. Oil and gas companies are feeling significantly more pressure to measure and report on their risk related to climate change. This is being driven by organizations such as the Financial Stability Board’s Task Force on Climate Related Financial Disclosures (FSB TCFD). As these disclosure recommendations are being refined and published, large global companies have asked members of the G20 countries to follow the recommendations of the TCFD. Governments are asked to accept and implement the task force guidelines which would require companies to disclose their climate risk. They are expected to disclose physical, liability and transition risks to investors, lenders, insurers and other key stakeholders.  This increase in transparency will inform market participants, whether they be investors, insurance companies or consumers.  Improved knowledge of these risks will likely shift investment and consumer behavior, potentially to the detriment of the disclosing organizations and the communities where the operate.

As market shifts, both through change in consumer preferences and regulations, there is significant risk of stranded assets for oil and gas companies. These companies will find it more difficult to continue to produce from their fields and bring their product to market. Further, increasing regulations will increase operating costs and reduce consumption of petroleum-based products. This could particularly be the case, as the transportation sector shifts toward electric powered vehicles, 78 percent of oil consumed in the United States goes toward transportation. Natural gas will likely be less impacted by this shift to an electric vehicle fleet as it is still seen as the primary fuel for our country’s base load electric power. However, that is not guaranteed as we see the price of renewable energy and batteries continue to decline rapidly. As these technologies continue to evolve and integrate, the cost and intermittency that has plagued the viability of these technologies largely goes away.

So if you are a community dependent on the oil and gas sector, such as Houston, how do you adapt to this climate risk? Houston will not only see greater direct climate risks from flooding, extreme heat, hurricanes, and even droughts, it is also likely to be impacted by the shift from carbon-based fuel sources.

The City of Houston has significant financial liabilities that are difficult to keep up with even in good economic times. The unfunded pension liability and the $1.7 billion in road bond debt, accruing $200 million in annual interest are good examples of the liability. The real vulnerability Houston faces is that although it has diversified economically to a greater extent than the 1980’s, 70% of its economic base is still dependent on the oil and gas sector; the region also has over 50% of the refining capacity in the United States.

The most recent decrease in prices demonstrated how vulnerable the upstream market is to price shifts and the impact on the Houston economy. During the 2014 drop in oil prices, the Houston region lost over 77,000 jobs in the oil and gas industry, largely upstream positions. This blow was softened a bit due to mid-stream and downstream oil and gas activity. Much of the opportunities shifted from west Houston to east Houston. However, Houston is now facing a much more significant issue. The drive to disclose climate risk in the oil and gas sector and the growing momentum to divest in oil and gas companies by large investment firms, is going to impact the entire oil and gas sector, upstream, midstream and downstream.

Climate risks from a changing climate, and climate risks due to changing market preferences, will be a significant issue for the City of Houston, its industry and residents. Will oil and gas companies make the shift to more diversified energy companies to increase portfolio diversity and lessen risk? Will the City of Houston start taking seriously its climate vulnerability and risk and prepare its infrastructure and community for a rapidly changing climate? ? Will it make a more concentrated effort to attract new innovative industry sectors?  Unfortunately, the answer to all of these questions appear to be not really. There is some talk, but the reality on the ground indicates otherwise.