As climate change accelerates, the conversation around climate finance is shifting from a singular focus on mitigation to a more integrated approach that includes adaptation and resilience. The recent webinar on climate taxonomies and disaster resilient infrastructure  organized by the Coalition for Disaster Resilient Infrastructure (CDRI), shed light on how climate finance mechanisms, particularly taxonomies, can catalyze investments in resilience. The discussion stressed on the need for infrastructure investments today which can withstand the climate shocks of tomorrow.

Why climate taxonomies matter for resilient infrastructure

Taxonomies serve as classification systems that guide investors toward sustainable and climate friendly projects. Historically, these frameworks have centered on mitigation—reducing greenhouse gas emissions. However, as highlighted by the panellists, resilience must be an equally critical component of climate finance taxonomies. By embedding disaster resilience within taxonomies, financial markets can more effectively channel funds toward infrastructure projects that are both sustainable and capable of withstanding climate induced disasters.

One of the key insights from the webinar was the introduction of a resilience-specific taxonomy. This can define what constitutes a resilient infrastructure investment and provide measurable criteria for assessing the resilience benefits of different projects. It can also ensure that investments are directed towards projects that actively reduce vulnerability, avoid maladaptation, and casue no significant harm to other environmental goals.

Disaster risk finance and sustainable recovery

An essential element of financing resilience is the link between Disaster Risk Finance (DRF) and climate taxonomy initiatives. The panellists underscored how resilience focused taxonomies can facilitate the creation of financial instruments—such as resilience bonds with clear resilience indicators, insurance-linked securities, and adaptation-focused loans—that incentivize investments in risk reduction.

DRF plays a crucial role in ensuring sustainable recovery after disasters. When infrastructure is designed with resilience in mind, the cost of reconstruction is significantly reduced, and service continuity is enhanced. As noted in the discussion, proactive investments in resilience, such as upgrading power grids and storm-proofing critical infrastructure, can prevent catastrophic failures, reduce financial liabilities, and provide long-term economic benefits.

Additionally, DRF incentivizes investments in risk reduction measures by directly impacting the cost of financial instruments such as insurance and catastrophe bonds. By demonstrating a commitment to resilience through risk mitigation investments, infrastructure developers and asset owners can benefit from:

• Reduced risk transfer premiums and greater insurance accessibility: Insurers and reinsurers determine policy premiums based on an asset’s risk profile.  Incorporating resilience measures in infrastructure assets can lead to reduced risk transfer premiums and increased insurance access because it lowers the risk profile, making the infrastructure assets more attractive to insurers and potentially leading to lower costs and wider availability of coverage.
• Lower cost of capital: Investors and lenders are more likely to offer favourable financing terms, such as lower interest rates or extended repayment periods, to infrastructure projects with demonstrated resilience capabilities.
• Improved risk retention capabilities: Organizations that invest in disaster resilience can absorb more risk without requiring expensive external risk transfer solutions, improving financial stability in the long run.

Financing the additional cost of building resilience: Capturing the ‘Resilience Dividend’

One of the most compelling arguments for integrating resilience into financial frameworks is the concept of ‘resilience dividend.’ This refers to the quantifiable benefits of avoided damages, reduced business interruptions, and sustained service delivery during and after disasters. By embedding resilience KPIs and Average Annual Losses (AAL) assessments into financial decision making, investors can more accurately assess the long-term value of resilient infrastructure.

The webinar highlighted practical examples of how resilience investment leads to tangible financial benefits. For instance, Florida Power & Light (FPL) prioritized grid resilience after devastating hurricanes, investing billions in storm-proofing and smart grid technology. When Hurricane Ian struck in 2022, the utility restored power within days, whereas the other lesser prepared utilities suffered prolonged outages. This proactive investment not only safeguarded communities but also protected the company’s financial health.

On the contrary, Pacific Gas & Electric (PG&E) in California failed to invest adequately in grid resilience. Aging infrastructure contributed to massive wildfires, resulting in $300 billion in liabilities, extensive power outages, and ultimately, bankruptcy in 2019. This example underscores the financial and economic cost of failing to integrate resilience into infrastructure planning.

Another example is the Netherlands' Delta Works project, which showcases a large-scale resilience investment. Built to protect the country from flooding, it significantly reduces AAL by preventing storm surge damage. Similarly, in Japan, the Sendai Framework has guided resilience investment in earthquake resistant buildings, thus minimizing damage and accelerating recovery after seismic events.

Mainstreaming resilience in climate finance

The experts emphasized the importance of mainstreaming resilience in climate finance through a multi-pronged approach:

1. Developing robust taxonomies: Financial regulators and investors must adopt taxonomies that explicitly recognize resilience investments and ensure these frameworks remain dynamic to accommodate evolving climate risks. The EU, Singapore, and China have been pioneers in developing green and sustainable finance taxonomies, but there is a need to expand these taxonomies to include resilience focused investments explicitly. Thailand[1] and Colombia[2], for example, are incorporating climate adaptation into their taxonomy, ensuring that investments in flood resistant infrastructure and resilient urban planning are prioritized.
2. Integrating insurance mechanisms: The insurance industry plays a pivotal role in linking resilience investments to financial incentives. Reduced insurance premiums for resilient infrastructure can serve as a powerful motivator for developers and investors. For instance, New Zealand's Earthquake Commission (EQC) has developed insurance models that encourage earthquake-resistant building design, lowering premiums for property owners who comply with stringent resilience standards. Similarly, Mexico's catastrophe bonds[3] provide financial protection against climate disasters, demonstrating how insurance-linked securities can play a role in financing resilience.
3. Advancing public-private collaboration: Governments must align public finance initiatives with private sector investments to scale up resilience funding. Bangladesh's Coastal Embankment Improvement Project (CEIP)[4] is a great example, where the government, international donors, and private finance stakeholders collaborate to develop storm-resilient embankments that protect millions of coastal residents. Additionally, initiatives like India’s Smart Cities Mission, integrate resilience planning into urban development, attracting international investors who see value in disaster resilient infrastructure.
4. Strengthening regional and global cooperation: International collaboration is crucial for ensuring interoperability among different taxonomy frameworks in an increasingly fragmented global landscape. Standardized resilience indicators and metrics can enhance investor confidence and facilitate cross-border financing for resilient infrastructure projects.  For example, the Caribbean Catastrophe Risk Insurance Facility (CCRIF)[5] enables small island nations to access immediate liquidity following disasters, ensuring faster recovery.
5. Creating financial incentives for resilience investments: Beyond taxonomy development and insurance, direct financial incentives can also help mainstream resilience. The United Kingdom's Green Finance Strategy [6] integrates resilience financing by offering subsidies for infrastructure projects that meet strict climate adaptation criteria. Similarly, SDG Indonesia One platform[7] provides increased access to various sources of funding for strategic projects that are oriented towards achieving the SDGs.
6. Leveraging technological innovations: Advancements in AI, big data, and geospatial analysis are transforming how resilience investments are assessed and financed. For example, Singapore’s National Water Agency uses IoT sensors to optimize stormwater management[8], reducing flood risks in urban areas. Meanwhile, Norway’s Smart Grid Initiatives [9] incorporates real-time climate risk assessments into energy infrastructure planning, ensuring uninterrupted power supply during extreme weather events.

 Limitations of climate taxonomies

1. Lack of universality: Climate taxonomies differ across regions, creating inconsistencies that make it difficult for investors to operate in multiple markets without additional due diligence.
2. Complexity in implementation: Developing and applying taxonomies requires extensive technical expertise, making it challenging for small investors and developing countries to integrate them effectively.
3. Data gaps and measurement challenges: Quantifying resilience benefits and avoided losses remains a challenge in the absence of standardized methodologies and available data.
4. Potential for greenwashing: Without stringent verification processes, there is a risk that investments may be labelled as resilient or sustainable without meeting the criteria.
5. Slow adaptation to emerging risks: Taxonomies must remain dynamic, but frequent updates can be difficult to manage, leading to potential misalignment with evolving climate risks and resilience needs.

Financing the transition toward disaster resilient infrastructure is not just an option but an imperative for sustainable development. Climate taxonomies must evolve to recognize and prioritize disaster resilience, ensuring that infrastructure investments today are designed to withstand the climate challenges of the future. By leveraging disaster risk finance, capturing the resilience dividend, and fostering global collaboration, we can build a more resilient and financially sustainable future.

As the conversation continues, stakeholders across the finance, policy, and infrastructure sectors must work together to drive investment into projects that will safeguard communities, economies, and ecosystems against the growing threat of climate-related disasters.

[1] https://www.bot.or.th/en/financial-innovation/sustainable-finance/green/Thailand-Taxonomy.html

[2] https://www.climatebonds.net/files/reports/cbi_col_eu_taxonomy_01e.pdf

[3] https://www.worldbank.org/en/news/press-release/2024/05/15/world-bank-issues-175-million-in-catastrophe-bond-for-mexico-s-pacific-hurricane-risk#:~:text=The%20cat%20bond%20attracted%2022,forth%20in%20the%20bond%20terms.

[4] http://gis.betsbd.com/ceip_m/

[5] https://unfccc.int/topics/adaptation-and-resilience/resources/S-N/CCRIF

[6] https://www.gov.uk/government/calls-for-evidence/update-to-green-finance-strategy-call-for-evidence/update-to-green-finance-strategy-call-for-evidence-accessible-webpage#:~:text=evidence%2Daccessible%2Dwebpage-,Introduction,ensuring%20that%20businesses%20can%20benefit.

[7] https://www.ptsmi.co.id/sdg-indonesia-one

[8] https://govinsider.asia/intl-en/article/pub-yeo-keng-soon-hazel-khoo-exclusive-how-singapore-is-predicting-floods

[9] https://smartgrids.no/english/