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Reports on Climate Impacts Call for Courageous Financial Interventions to Bolster Resiliency

July 17, 2019

Recent reports on climate impacts and adaptation provide further justification for bold actions now to move Canada to a low-carbon and resilient economy. It’s clear in the reports, there is opportunity for forward-thinking businesses who plan for the impacts and leverage the opportunities in the short-term. Longer term projections are uncertain, but they point to the need for action now to avoid scenarios where our economic order and life systems are under severe pressure. This transition will require innovative and courageous financial interventions to reduce our emissions and prepare our economy for the coming chaotic climate.

Over the next 20 years in Canada, climate change could cause “significant losses, damages, or disruptions” to the food we eat, the water we drink, the roads we travel on, and the electricity that powers our modern lives. It will also upend the forests and ecosystems that we treasure and depend on for resources, our health, our communities, even our politics and governance are at risk, according to a new expert panel report on Canada’s climate change risks and adaptation potential.

The sweeping report was commissioned by the federal government, through the not-for-profit Council of Canadian Academies and written by experts from economics, human health, earth sciences, social sciences, climate change adaptation and risk assessment.

What tops the list of risks over the next 20 years are extreme weather events damaging our physical infrastructure, sea-level rise threatening our coastal areas, the melting permafrost upending northern communities, heatwaves and new diseases impacting our health, and temperature changes disrupting our ecosystems and fish stocks, says the report.

The threats are interdependent making them difficult to manage, according to the report. For instance, heavy rain and storm surges can damage infrastructure, which in turn can disrupt the delivery of health services, compromise water quality, and challenge governing structures during and after the disruption. The climate impacts pose a significant risk to “Canadian businesses and the economy,” says the report.

Moody’s limited scope says Canada to benefit from climate change

The broadly scoped report stands in contrast to a recent Moody’s Analytics’ quantitative report, examining the financial impact of climate change, that found Canada will benefit from climate impacts in the short term.  Moody’s Investors Service, a credit rating agency, and sister company to Moody’s Analytics, has said it wants to take climate into account when rating the credit scores for companies and municipalities. This report was a first foray into climate analysis by Moody’s Analytics.

The Moody’s report recognizes climate change will negatively impact human health and productivity in all countries, but some countries will benefit from the impacts over the next 30 years. Canada will gain a 0.31% in Real GDP from climate impacts by 2048 in the business-as-usual, on-the-road-to a 4.1 degrees Celsius temperature increase by 2100, scenario. Essentially, thanks to climate change, Canada’s economy will grow at a faster rate over the next 30 years than without it. Increased agricultural production, lower oil prices and a bump in tourism will be a net benefit to Canada, says the report. Other countries, primarily poorer countries, will feel a much deeper impact, with Saudi Arabia seeing an over 10 per cent hit to their GDP by 2048 under the same 4.1 degrees Celsius scenario.

The Moody’s report does not quantify the serious risk of extreme weather events or mass internal/external migration and recognizes longer-term impacts will be far worse if not mitigated. In many ways, it is a limited scoped report that does not take into account the worst effects of climate change and the interconnected stresses the impacts will have. Moody acknowledges this in their report, saying the “scope of our study was not comprehensive,” but aims to improve their analysis for the next report.

Mitigating climate change to a 2-degrees-Celsius increase in global average temperature is still expected to cost the global economy $69 trillion by 2100, according to an IPCC report. At this point, global emissions are rising and would need dramatic drops to reach even the 2C target. System-wide adaptation is needed.

Both the expert panel and Moody’s report excluded climate change opportunities from their assessments. 215 large companies, representing nearly $17 trillion (U.S.) in market capitalization, reported some $2.1 trillion in climate-related opportunities, according to CDP’s Global Climate Change Analysis 2018 report. This was twice the projected cost of short-term risks.

In the near-term, it’s possible some industries in Canada will benefit from impacts, while wider climate-related opportunities hold even more promise. It’s also clear climate impacts will be far worse for businesses and economy in the latter half of the century. Therefore, businesses need to develop strategies – incorporating innovative solutions – to mitigate and adapt to climate change to protect their business interests now and into the future.

Adaptation possible but new models required

The expert panel on climate risk and adaptation says the threats facing Canada can be “meaningfully reduced through adaptation measures.” They advise that the best available science indicates we should improve conservation, restoration and forest management practices to protect our natural life systems, since climate change is advancing “too fast for natural systems to keep pace.”

The panel’s review of evidence reveals that adaptation measures should take into account the interconnected climate risks while also focusing on reducing emissions. For example, we should conserve wetlands to reduce climate risk for vulnerable species, which also protects coastal or flood-prone communities and sequesters carbon – a win-win-win scenario. Business and governments need to do systemic risk assessments to understand how to maximize these low-hanging fruit opportunities and develop strategies to effectively price our natural capital.

An innovative model to price the climate resiliency of natural services is being explored along Mexico’s Caribbean Coast. The Mexican government along with the tourist industry is funding insurance to repair 60 kilometers of coral reef if they are damaged during storms. Healthy reefs can reduce wave energy during storms, protect coastal communities and limit beach erosion. They are increasingly being perceived as key to protecting the tourist industry in the region.

The expert panel also highlights that we should take advantage of windows of opportunity, such as formulating recovery plans in advance of disasters to ensure higher standards are followed when rebuilding. Furthermore, when deciding on actions, we should take into account the technical feasibility, social licence, and ability to achieve other policy objectives, such as poverty reduction, says the panel.

Low-income communities will be the hardest hit – new solutions are needed

Climate impacts will disproportionally affect the world’s most at-risk communities both abroad and at home.  We have recently seen a number of reports identifying this and providing insights and recommendations to tackle the problem, including the Expert Panel on Sustainable Finance (yes another expert panel) and recently the City of Toronto’s First Resiliency Strategy.

Another report tackling this problem is a recent policy paper from The San Francisco Federal Reserve. The paper recommends banks tie-in climate resiliency in their lending to low-income communities under the Community Reinvestment Act (CRA). Under the CRA, in an effort to ensure low-income communities are serviced by financial institutions, banks are mandated to provide credit in all the communities they operate and are evaluated every five years. The policy paper recommended banks receive credit under the CRA to make loans to bolster resiliency before and after a disaster and support businesses hiring and providing services to displaced people.[1]

It’s clear from the near continuous stream of reports from academia and expert panels, rapid decarbonization and strategic resiliency is urgently needed – financing must play a major role to mobilize these solutions. Whether it is protecting coral reefs or bolstering low-income communities, solutions need to be packaged in a way that attracts investment and investors must become more creative to rise to the challenge and seize the investment opportunities. In 2019 and beyond, smart investment must include resiliency considerations through a climate lens.

Policymakers and regulators have a role to play to facilitate resiliency investing, however the science—and cross-functional experts—tell us we may not have time to wait for the implementation of policy. We must mobilize to unlock the trillions of dollars of investments to avoid the unmanageable, manage the inevitable, and maximize the opportunities where possible.

[1] The paper is meant for development practitioners, investors and policy makers, it is not the opinion of the Federal Reserve Bank of San Francisco. There is no equivalent lending requirement in Canada.