Why Nations Will Meet Paris Climate Agreement Goals

Paris Agreement and Climate Change Risk:

The Paris Agreement was the first time all countries came together to work toward a reduction in global greenhouse gas emissions in an effort to mitigate climate change. In a 2015 study published in Nature if the world was able to maintain its commitments toward meeting the Paris Agreement goals then it could be expected that:

  • A third of oil reserves
  • Half of gas reserves
  • 80% of known coal reserves

will stay in the ground. Although this would be good for the overall health of the planet by reducing impact of climate change, it would be disastrous for resource extraction based companies. However, with recent reports, companies that work on the extraction of oil, gas and coal may not have much to worry about if current trends continue. Even with the Paris Agreement accords we see many countries not meeting their goals and actually increasing their emissions. Globally, we see more coal plants coming online to support developing countries appetite for growth. Also, we continue to see increases in emissions from the transportation sector.

Is this growth in emissions a hiccup and expected to be short lived? Some would argue that it is.

Why could this be just a hiccup?

Due to growing global climate change risk countries and companies continue to take steps to transition from the burning of fossil fuel. With decreasing costs of fossil free alternatives, the effort to debarbonize is becoming much easier.

The most recent levelized cost of energy studies, show all PV solar and wind to be cost competitive with natural gas and coal fired power plants. This was not necessarily the case at the signing of the Paris Agreement. Costs will continue to decrease for these generation assets and it will be more difficult to fund more expensive fossil-fuel alternatives. Further, as more renewable energy facilities are built out, the diversity of locations for these systems will reduce the intermittency issues that have been a concern for power grid operators. Not only the number of systems and the diversity of location are a benefit, but so is the significant ongoing decrease in the price of battery storage. On a regular basis, new reports are published on the ongoing decreasing cost of battery storage.

The technology is coming quickly and is ready for deployment. Much of the barrier is now political. Globally, risk adverse elected officials responding to very powerful fossil fuel interests, has resulted in an unlevel playing field with markets and regulations not properly accounting for and allowing new clean energy technologies.

What happened after the Paris Agreement?

 It was expected that when the Paris Agreement was signed  everyone was ready to go and begin to implement all these climate change mitigating measures. The fact of the matter is that there were many well meaning pledges, but the economic and political reality was not yet there for many parts of the world. Although we needed these goals to be met sooner rather than later, it takes time.

Technologies needed to be further developed and costs had to continue to decline. The financial markets and capital providers had to become more comfortable with valuing and funding these new technologies. Government regulators and policy makers had to better understand the barriers to deploying these systems and start making the appropriate changes that would not hinder the deployment of clean energy systems. Finally, the clean energy sector needed more allies and a bigger voice to compete with the more powerful fossil fuel lobby. 

Winds of Change

Financing and Investment in Clean Energy

Things are looking up. Specific to investing in clean energy, in 2017, clean energy investment outpaced fossil fuel investment by a significant amount, $333 billion vs $144 billion, respectively.  A specific funding instrument growing in popularity are green bonds. They are becoming one of the largest investment vehicles for energy efficiency and renewable energy investments. In 2018, it is expected that there will be $250 billion in green bond new offerings. This is 60% higher than 2017, which was $155 billion.  2017 saw a 60% increase in investment from 2016 (See graph below).

Source: Bloomberg

Political Winds are Changing

On the political side, at least outside of the US, we see a more robust shift to taking serious steps toward decarbonization and reducing climate change risks. The European Parliament is getting more serious in supporting plans to facilitate EU capital markets to meet long-term sustainability goals, which includes decarbonization, disaster resiliency and resource efficiency.

On May 29th the European Parliament adopted the sustainable finance resolution. Which includes:

  • Rules to orient financial markets towards environmental objectives
  • Policy framework to encourage investments into sustainable assets
  • Divestments from fossil fuels and unsustainable energies

The first two items are key areas that all countries must further develop to ensure Paris Agreement goals are met and exceeded. Without the proper market and regulatory framework in place, the investment community and companies will be less willing to transition to cleaner technologies. Item three, divestments are already happening. They will only become more rapid as the rules and frameworks around clean energy are developed.

Divestment Continues

What we are seeing in the market in regards to divestment should provide some hope for clean energy and concern for fossil fuel interests.

For example, hedge funds are seeing a 50% increase in demand for responsible investment offerings from current and prospective investors. This is according to a survey of about 80 managers from the Alternative Investment Management Association.

Another significant move was made by the state of New York and and New York City to actively divest from existing and future fossil based investments. To date, endowments and portfolios managing over $6 trillion are actively divesting from fossil fuel assets. Pension funds have come to the realization that they must protect their portfolios from climate change. Fossil fuels are not the future and their investments are at risk.

Stranded Assets Due to Climate Change

As divestment occurs, one of the primary concerns is the threat of fossil fuel stranded assets. These are largely reserves that will not be used as global markets move to clean energy resources.

What is a stranded asset? According to University of Oxford Smith School and Enterprise and the Environment, a stranded asset are “assets that have suffered from unanticipated or premature write-downs, devaluations, or conversion to liabilities and they can be caused by a variety of risks.”

At risk are assets listed on the financial statements of energy producers and a reduction in anticipated cash flows for future production which may be reflected in company stocks.

Risky Business

Oil and gas companies may see transitioning their business model to clean energy as risky. Some have made some initial transitions, Total, Statoil, Shell and BP for example. At this time, their clean energy investment is still minor compared to their overall fossil fuel investment strategies. For example, of Shell’s $30 billion investment budget only $2 billion goes to renewables.

Although this climate change transition may be risky, not paying serious attention and taking serious steps toward transitioning to clean energy assets may be even more risky. There is a lot of uncertainty as to the speed to which this transition will happen. A miscalculation in the speed of this trend could have dire consequences for fossil fuel companies. A recent report by the Oxford Institute for Energy Studies, “The Rise of Renewables and Energy Transitions,” lays out the significant risks of stranded assets that could be faced by those who do not choose wisely ( a little Indiana Jones reference). Moving to be an integrated energy company rather than an oil and gas pure play is probably the most appropriate choice in the current energy landscape. A recent study by Wood Mackenzie, finds that over the next 20 years renewables will be the fastest-growing primary energy source worldwide. They anticipate average annual growth rates of 6% for wind and 11% for solar. In contrast demand for oil, is anticipated to grow about 0.5% per year.

Growth in Renewable Energy vs. Fossil Fuels

Concerns over climate change risk are real and are being taken seriously by financial decision makers and policy makers. This would suggest that fossil fuel companies can no longer take a wait and see approach. The technology and markets are changing rapidly and for their own viability and of the communities they serve, they probably should get on board.

 

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Post-Hurricane Harvey, Can We Build Back Better?

According to FEMA damage estimates over 105,000 structures in the Houston-Galveston region experienced damage due to Hurricane Harvey natural disaster. The City of Houston government buildings alone realized approximately $175 million in damage.  This is $100 million over their insurance limit.  Both the private and public sector are actively working recovery efforts with a desire to rebuild as quickly as possible. Most have made their FEMA claims and those that have flood insurance, only about 15% of the population, have met with adjusters and are actively pursuing their claims.

Check out the HARC Story Map on Hurricane Harvey Impacts to learn more.

As I talk with people both in the private and public sector, the underlying concern is how harvey story mapwe are going to rebuild from this natural disaster. Based on my own conversations, many know they are not going to be made whole whether they have FEMA and/or insurance. Further, these conversations reveal that many do not want to build back to what was, they want to build to be more resilient. Unfortunately, the funding to do so appears not to be available. Many would like to stay in their neighborhood and build-up, however, $100,000 which are estimates they are hearing to raise their elevation, are not in the cards.  Some may get buyouts, but that is a fraction of the structures that were affected and remain in harm’s way.

The city government and school districts are not in a much better position.  They are largely looking to restore the existing building and get services back to normal. I have not seen anything about rebuilding more resilient public buildings, but maybe we are too soon in the process. Like those in the private sector, it is unlikely they will get any funding in the near-term, state or federal, that will allow this to happen.

Beyond the individual property recovery, there is also consideration for larger infrastructure recovery and resilience improvements to mitigage natural disasters. Items include the third reservoir in the northwest of the region, the Ike Dike, speed up the completion of the of Brays Bayou mitigation project, to name a few.  Similar to individual properties, they also do not appear to have the adequate funds available.  (Except for maybe Brays Bayou completion.)

I have written in previous posts about the funding options that are available for improving the resilience of communities.  They can be found here and here.  In both of these articles, I discuss a variety of funding mechanisms that can be used to improve community resilience including green bonds, resilience bonds, and public-private partnerships.

Solution: Resilience Bonds 

I would like to focus a bit more on resilience bonds.  Resilience bonds are bonds that allow issuers to build infrastructure to reduce loss or likelihood of loss during a natural disaster event; build new infrastructure with the expectation of reducing risk. These can be used for coastal protection, sea walls, stormwater mitigating green infrastructure, etc.

For a resilience bond, the issuer would utilize a catastrophe model to determine baseline risk to infrastructure from natural disasters. The issuer would then calculate how the implementation of a more resilient system would reduce future loss in comparison to this baseline. A resilience rebate is set based on the value of the anticipated reduced loss. The reduced risk of principal to the investor and the reduced premium expense to the sponsor is captured and provided to the sponsor as a rebate. This rebate can be used for financing resilient infrastructure or risk reduction investment.

pier and beamI am not an insurance expert, but the way I understand it is that building more resilient reduces the risk of a project to a natural disaster. This decrease in risk reduces the premium of the catastrophe bond (cat bonds) which is already being issued to cover infrastructure in the event of a major triggering event.  The rebate is coming from a lower cost of cat bonds. For example, cat bonds that cover flood damage or storm surge damage, when up for renewal, can be paired with a set of resilience-focused projects. These projects will lower risk to this infrastructure, thereby reducing premiums resulting in funds available to invest in more resilient infrastructure.

By taking steps to improve resilience utilizing resilience bonds, the public sector reduces risk to infrastructure, as well as realize economic, financial benefit from the proceeds of the resilience rebate. Resilient infrastructure funding by resilience bonds can reduce economic, social and environmental risk, as well as receive financial benefit of avoided losses. Cat bond costs also continue to go down in cost as more resilient infrastructure is added to the community. Further, more resilient infrastructure would also reduce costs of individual hazard insurance, wind, flood, etc. Not only does government see lower insurance costs, so would households and private companies.

What About Individual Property Owners? 

What has been discussed here is largely focused on public sector facilities and infrastructure development. We still are lacking the mechanism for private properties, commercial and residential. This is becoming an even more urgent issue as we see the National Flood Insurance Program is under significant financial duress and is actively working on moving properties off of this insurance into the private market. One thing to consider as this $1 billion transition occurs, is for Texas to create to flood insurance program similar to the Texas Windstorm Insurance Association (TWIA).

In May of this year, the TWIA sponsored a $400 million cat bond and currently has $4.9 billion in aggregate funding.  This amount is anticipated to cover the current hurricane season. What can make the TWIA more sustainable, would be to consider resilience bonds as it renews its cat bonds. This would include using cat models to assess wind risk to private properties. It could then assess what strategies can be done to reduce this risk to private properties. A good guide to follow would be the Fortified Standard. If properly structured, the TWIA would see a resilience bond rebate. These rebate dollars would then be set in a fund that can be provided to homeowners to reduce their wind risk to hurricanes and straight-line wind events. The outcome would be more resilient infrastructure, less costs for damage recovery and overall improved community resilience.

Keesler Air Force Base: One year after KatrinaResilience Bonds to Mitigate Flooding for Private Sector

Can a similar process be considered for the flood insurance market? There appears to be a healthy appetite for cat bonds by institutional investors. What would it take for the state to issue flood-related cat bonds? Can the state accurately assess flood risk for the private sector? There is ongoing concern about the accuracy of our flood models and floodplain maps, particularly along the Gulf Coast. If we can agree on the risks, can we identify the appropriate risk mitigation strategies for individual structures? I would not think that is an impossible task. We would then need to quantify the avoided loss with the implementation of these strategies. This would create the rebate. This resilience rebate could then be available for individual property owners to implement the mitigation measures. The result would be lower individual premiums, lower recovery costs and an overall improvement in community resilience from natural disasters.

 

 

 

 

 

Book Review: Drawdown – The Most Comprehensive Plan Ever Proposed to Reverse Global Warming

Title: Drawdown: The Most Comprehensive Plan Ever Proposed to Reverse Global Warming

Editor: Paul Hawken

Publisher: Penguin Books

Year Published: 2017

Price: $17.31

When this book arrived in the mail I was shocked. I was not expecting a book with coffee table dimensions. It is a wonderfully designed book. The solutions are well organized, the writing is accessible to all readers and the pictures are eye-catching.

The genesis of this book came from Hawken’s realization that there is not a comprehensive checklist of technologies and solutions for climate mitigation and climate adaptation. After several years of looking for this list and not finding one, he decided he would need to bring together and work with the top climate experts in the world to come up with a list of solutions that have the greatest potential of reducing emissions and sequestering carbon from the atmosphere. The outcome is the Drawdown organization and this book. The book is just the beginning. It is anticipated that this will be a living plan with regular analysis and updates from Drawdown and found at www.drawdown.org 

The Foreword is provided by Tom Steyer, Founder of NextGen Climate. Here he discusses the importance of identifying innovative solutions to climate change, and particularly not just technological solutions but solutions that work in tandem with natural systems. Steyer sees Drawdown as a roadmap with a moral compass that finally provides a vision that allows all of us to work together to build a cleaner and better world.

In the book over 80 solutions are identified and ranked based on the greenhouse gas reduction potential out to the year 2050. Of the top 20, reductions in the food, energy and the land-use sector are the most commonly seen. The number one solution identified is refrigeration. The problem is the proliferation of refrigeration using hydrofluorocarbons (HFC). HFCs were adopted to replace the ozone depleting chlorofluorocarbons (CFC), hydrochlorofluorocarbons (HCFC). In October 2016, in Kigali, Rwanda, the Montreal Protocol was amended to start the phase-out of HFC. However, with an anticipated 700 million air conditions being in circulation by 2030, many using HFC, this will be quite a monumental task to reign in the use of HFC.

The book provides a concise review of each of the 80 options taking into account reductions in GHG potential, net costs and the net savings of taking action. The authors do a nice job of bringing in real world examples of struggles, as well as success stories of communities and governments implementing these solutions. The solutions are broken into categories of energy, food, women and girls, buildings and cities, land-use transportation and materials. There is also a wish list presented at the end of the book of high value, but not yet fully scaled solutions such as smart highways, the hyperloop, marine permaculture and the artificial leaf.

Solutions are plentiful, both those that are already being implemented, as well as those that have some near-term potential of scaling. The book does a nice job by bringing together high impact solutions to one place for easy access and evaluation. That being said, I would not call the book a comprehensive plan. At the most a comprehensive list, but not a comprehensive plan. It is definitely a call to action. It is inspirational and provides hope and optimism that there is a way to salvage our planet through cost effective emission reducing solutions. But at the end of the book, I was still asking myself what is the plan? Maybe that is asking too much. This book takes a global approach to identify a list of solutions. We probably should not expect it to provide an actual plan to implement these measures at a national or sub-national level.

I believe the book does provide local planners and officials a better idea as to what solutions may be viable, but there still needs to be considerable work at the federal, state and local level to turn the list of solutions into a workable plan. Stakeholders must be engaged and priorities must be identified and set. Communities need to conduct cost benefit analysis to see what is economically practical. Regulations and policies must be changed that would allow for proper valuation and inclusion of these solutions and remove the barriers to their adoption. Finally, for any solution to work or plan to implemented, there needs to be funding. I was hoping this book would begin to present these funding solutions but none are identified. Fortunately, there is growing interest by institutional investors and the market in general to push more funds to climate solutions. 

To sum, it is a great list of solutions. It is well researched and well laid-out. It should be a must-read for any planner, government official or policy maker. For anything to happen in reducing greenhouse gases, it is vital that these solutions are known, quantified and ranked and the book does just that. Learn more at the image below.

Book Review: Drawdown – The Most Comprehensive Climate Plan Ever Proposed to Reverse Global Warming

Title: Drawdown: The Most Comprehensive Plan Ever Proposed to Reverse Global Warming

Editor: Paul Hawken

Publisher: Penguin Books

Year Published: 2017

Price: $17.31

When this book arrived in the mail I was shocked. I was not expecting a book with coffee table dimensions. It is a wonderfully designed book. The solutions are well organized, the writing is accessible to all readers and the pictures are eye-catching.

The genesis of this book came from Hawken’s realization that there is not a comprehensive checklist of technologies and solutions for climate mitigation and climate adaptation. After several years of looking for this list and not finding one, he decided he would need to bring together and work with the top climate experts in the world to come up with a list of solutions that have the greatest potential of reducing emissions and sequestering carbon from the atmosphere. The outcome is the Drawdown organization and this book. The book is just the beginning. It is anticipated that this will be a living plan with regular analysis and updates from Drawdown and found at www.drawdown.org 

The Foreword is provided by Tom Steyer, Founder of NextGen Climate. Here he discusses the importance of identifying innovative solutions to climate change, and particularly not just technological solutions but solutions that work in tandem with natural systems. Steyer sees Drawdown as a roadmap with a moral compass that finally provides a vision that allows all of us to work together to build a cleaner and better world.

In the book over 80 solutions are identified and ranked based on the greenhouse gas reduction potential out to the year 2050. Of the top 20, reductions in the food, energy and the land-use sector are the most commonly seen. The number one solution identified is refrigeration. The problem is the proliferation of refrigeration using hydrofluorocarbons (HFC). HFCs were adopted to replace the ozone depleting chlorofluorocarbons (CFC), hydrochlorofluorocarbons (HCFC). In October 2016, in Kigali, Rwanda, the Montreal Protocol was amended to start the phase-out of HFC. However, with an anticipated 700 million air conditions being in circulation by 2030, many using HFC, this will be quite a monumental task to reign in the use of HFC.

The book provides a concise review of each of the 80 options taking into account reductions in GHG potential, net costs and the net savings of taking action. The authors do a nice job of bringing in real world examples of struggles, as well as success stories of communities and governments implementing these solutions. The solutions are broken into categories of energy, food, women and girls, buildings and cities, land-use transportation and materials. There is also a wish list presented at the end of the book of high value, but not yet fully scaled solutions such as smart highways, the hyperloop, marine permaculture and the artificial leaf.

Solutions are plentiful, both those that are already being implemented, as well as those that have some near-term potential of scaling. The book does a nice job by bringing together high impact solutions to one place for easy access and evaluation. That being said, I would not call the book a comprehensive plan. At the most a comprehensive list, but not a comprehensive plan. It is definitely a call to action. It is inspirational and provides hope and optimism that there is a way to salvage our planet through cost effective emission reducing solutions. But at the end of the book, I was still asking myself what is the plan? Maybe that is asking too much. This book takes a global approach to identify a list of solutions. We probably should not expect it to provide an actual plan to implement these measures at a national or sub-national level.

I believe the book does provide local planners and officials a better idea as to what solutions may be viable, but there still needs to be considerable work at the federal, state and local level to turn the list of solutions into a workable plan. Stakeholders must be engaged and priorities must be identified and set. Communities need to conduct cost benefit analysis to see what is economically practical. Regulations and policies must be changed that would allow for proper valuation and inclusion of these solutions and remove the barriers to their adoption. Finally, for any solution to work or plan to implemented, there needs to be funding. I was hoping this book would begin to present these funding solutions but none are identified. Fortunately, there is growing interest by institutional investors and the market in general to push more funds to climate solutions. 

To sum, it is a great list of solutions. It is well researched and well laid-out. It should be a must-read for any planner, government official or policy maker. For anything to happen in reducing greenhouse gases, it is vital that these solutions are known, quantified and ranked and the book does just that. Learn more at the image below.

Jumping the Gun on Climate Asset Risk Disclosure?

sinking oil rigOne of the primary focus areas of this site is to push for greater transparency in the market around climate risk to the private sector (here and here). I mentioned in a previous post that the oil and gas sector alone could potentially see $2.2 trillion of stranded fossil fuel assets, with the United States potentially seeing the greatest loss. It is vital for the sustainability of the private sector and our global economy that shareholders and stakeholders are aware of what potential risk that may be faced by companies. The practice of disclosure will benefit both the company and its shareholders. It will force companies to take a hard look at their operations and risk management strategies and assess what actions may need to be taken to mitigate this risk. It will help current and future shareholders to better understand the risk they face when investing in a company.

For the last 15 years, the Climate Disclosure Project (CDP) has been working to get companies, as well as the public sector, to voluntarily disclose their greenhouse gas emissions and carbon related activities. The belief is that disclosure of this information by both the private and public sector will result in more effective management of carbon, as well as better management of climate risk. In their most recent report,  CDP was able to have over 1,000 companies disclose their climate data, out of a pool of 1,839. Not a bad number for a voluntary disclosure program. Of those reporting, the highest percentage of reporting came from the IT and healthcare industry, while, not surprisingly, the lowest percentage came from the energy and utility sector, 40% and 38%, respectively.

However, although we are seeing a lesser percentage of the energy sector participating in the 2016 CDP report, we may be seeing a growing number in the next few years. In the last couple of years we have seen a growing trend in the number of carbon asset risk resolutions that are being presented to company boards. According to the CERES Shareholder Resolution Database, 75 resolutions were brought before shareholders. The majority of these resolutions for carbon asset risk disclosure are power companies and oil and gas companies. There were also a smattering of banks, a real estate company and some mining companies. The mining companies appear to have the most success in getting these resolutions passed. They went three for three in the resolutions proposed and passed. These mining companies include Rio Tinto, Anglo American and Glencore Plc.  Although we saw over 40 oil and gas companies with resolutions proposed, only 10% of them passed. This includes ExxonMobil and Occidental Petroleum, on their second try in two years, as well as Suncor in 2016, BP in 2015 and Royal Dutch Shell in 2015. Chevron and Anadarko withdrew their resolutions in 2017. However in 2016, they were pretty close with more than 40% of shareholders voting for carbon risk disclosure.

In any case, what we are looking for are small wins and I think we saw some this year. Further, it is likely that we will continue to see more disclosure resolution activity as the SEC further defines its materiality requirement in its Guidance Regarding Disclosure Related to Climate Change. Under this guidance, the SEC only requires disclosure of climate risk if there appears to be a material risk to the company. There is still some interpretation as to what is “material” related climate risk to a company. That is why we see the ongoing push back by much of the energy sector on disclosing these risks. They argue there is still significant climate, consumer and regulatory related uncertainty that makes this risk difficult to quantify at this time. It is anticipated that this argument may lose some of its strength as we continue to refine our global climate models and the downscaling of these models.

A group that is out front that is trying to better define climate risk and promote the disclosure of this risk is the Task Force on Climate-related Financial Disclosures.  They are actively developing resources, guides and scenario tools to help companies better determine their risks and report on them. At the end of 2016 they came out with their recommendations for how companies should prepare and provide climate risk-related financial disclosures. The focus is on helping the business community, lenders/investors and regulators through the development of a framework that makes providing, understanding and using this data a bit easier.

There is some argument that at this time the Task Force has gone a bit too far. The IHS Markit organization has just come out with its own report that pushes back on the TCFD recommendations arguing that although it is a good framework that is useful for assessing climate risks, it is difficult to tie these climate risk indicators to actual financial impacts. They argue there is still too much uncertainty on the scale and timing of these climate risk factors and financial decisions by investors could be skewed by these indicators.

My take on this, is that it is good to have a healthy dialogue between these groups. There is still some uncertainty on the scale and timing of climate events, regulations and changes in customer preferences. It is possible that investors may take this climate risk disclosure information and potentially jump the gun and divest when it would be fine for them to stay invested for the near to mid-term. So, we need to continue to refine our frameworks, models and scenario tools to ensure we have the best information available. However, we don’t need to wait until it is perfect with 100% certainty. sinking oil rig

Jumping the Gun on Carbon Asset Risk Disclosure?

sinking oil rigOne of the primary focus areas of this site is to push for greater transparency in the market around climate risk to the private sector (here and here). I mentioned in a previous post that the oil and gas sector alone could potentially see $2.2 trillion of stranded fossil fuel assets, with the United States potentially seeing the greatest loss. It is vital for the sustainability of the private sector and our global economy that shareholders and stakeholders are aware of what potential risk that may be faced by companies. The practice of disclosure will benefit both the company and its shareholders. It will force companies to take a hard look at their operations and risk management strategies and assess what actions may need to be taken to mitigate this risk. It will help current and future shareholders to better understand the risk they face when investing in a company.

For the last 15 years, the Climate Disclosure Project (CDP) has been working to get companies, as well as the public sector, to voluntarily disclose their greenhouse gas emissions and carbon related activities. The belief is that disclosure of this information by both the private and public sector will result in more effective management of carbon, as well as better management of climate risk. In their most recent report,  CDP was able to have over 1,000 companies disclose their climate data, out of a pool of 1,839. Not a bad number for a voluntary disclosure program. Of those reporting, the highest percentage of reporting came from the IT and healthcare industry, while, not surprisingly, the lowest percentage came from the energy and utility sector, 40% and 38%, respectively.

However, although we are seeing a lesser percentage of the energy sector participating in the 2016 CDP report, we may be seeing a growing number in the next few years. In the last couple of years we have seen a growing trend in the number of carbon asset risk resolutions that are being presented to company boards. According to the CERES Shareholder Resolution Database, 75 resolutions were brought before shareholders. The majority of these resolutions for carbon asset risk disclosure are power companies and oil and gas companies. There were also a smattering of banks, a real estate company and some mining companies. The mining companies appear to have the most success in getting these resolutions passed. They went three for three in the resolutions proposed and passed. These mining companies include Rio Tinto, Anglo American and Glencore Plc.  Although we saw over 40 oil and gas companies with resolutions proposed, only 10% of them passed. This includes ExxonMobil and Occidental Petroleum, on their second try in two years, as well as Suncor in 2016, BP in 2015 and Royal Dutch Shell in 2015. Chevron and Anadarko withdrew their resolutions in 2017. However in 2016, they were pretty close with more than 40% of shareholders voting for carbon risk disclosure.

In any case, what we are looking for are small wins and I think we saw some this year. Further, it is likely that we will continue to see more disclosure resolution activity as the SEC further defines its materiality requirement in its Guidance Regarding Disclosure Related to Climate Change. Under this guidance, the SEC only requires disclosure of climate risk if there appears to be a material risk to the company. There is still some interpretation as to what is “material” related climate risk to a company. That is why we see the ongoing push back by much of the energy sector on disclosing these risks. They argue there is still significant climate, consumer and regulatory related uncertainty that makes this risk difficult to quantify at this time. It is anticipated that this argument may lose some of its strength as we continue to refine our global climate models and the downscaling of these models.

A group that is out front that is trying to better define climate risk and promote the disclosure of this risk is the Task Force on Climate-related Financial Disclosures.  They are actively developing resources, guides and scenario tools to help companies better determine their risks and report on them. At the end of 2016 they came out with their recommendations for how companies should prepare and provide climate risk-related financial disclosures. The focus is on helping the business community, lenders/investors and regulators through the development of a framework that makes providing, understanding and using this data a bit easier.

There is some argument that at this time the Task Force has gone a bit too far. The IHS Markit organization has just come out with its own report that pushes back on the TCFD recommendations arguing that although it is a good framework that is useful for assessing climate risks, it is difficult to tie these climate risk indicators to actual financial impacts. They argue there is still too much uncertainty on the scale and timing of these climate risk factors and financial decisions by investors could be skewed by these indicators.

My take on this, is that it is good to have a healthy dialogue between these groups. There is still some uncertainty on the scale and timing of climate events, regulations and changes in customer preferences. It is possible that investors may take this climate risk disclosure information and potentially jump the gun and divest when it would be fine for them to stay invested for the near to mid-term. So, we need to continue to refine our frameworks, models and scenario tools to ensure we have the best information available. However, we don’t need to wait until it is perfect with 100% certainty. sinking oil rig

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.