The 2023 biennial CDRI report on Global Infrastructure Resilience highlights the main challenges associated with the mobilization of finance for infrastructure resilience and proposes solutions to address them. Many of the issues were discussed during London Climate Action Week over the past few days.

Infrastructure investments required in Low- and Middle-Income Countries (LMIC) by 2050 are estimated at $2.9 trillion per annum. The sum of private capital and climate finance deployed in these countries was short of $100 billion in 2021, demonstrating the need to mobilize finance of a different order of magnitude. Ensuring that the trillions of dollars invested in the next decades lead to infrastructure systems that are resilient is the objective.

The challenges are varied. They include: a lack of adequate policy and regulatory frameworks incorporating standards for resilient infrastructure; the need to embed physical climate risks in investment appraisal, which requires data, metrics and methodologies for doing so; an efficient way to monetize and allocate resilience benefits through public policies; and mechanisms to aggregate local infrastructure projects so that funding can be mobilized at scale for pipelines of “bankable” projects.

Solutions exist. They broadly fall into three categories. 

First, resilience should be redefined as an opportunity rather than as a cost by ensuring that the risk-adjusted return of resilient infrastructure is attractive to capital providers. This requires expanding the definition of resilience to include network and ecosystem benefits, quantifying these benefits through appropriate public sector funding mechanisms such as tax credits and subsidies, and allocating the benefits between public and private sector stakeholders. 

Second, natural risks should be appropriately assessed and mitigated as part of project design and investment decisions. The Physical Climate Risk Assessment Methodology (PCRAM) developed by the Coalition for Climate Resilient Investment (CCRI) and recently endorsed by the Institutional Investors Group on Climate Change (IIGCC) aims at identifying asset specific engineering, commercial and financial materiality thresholds associated with an exposure to climate hazards. This approach leads to an adjustment of cashflow forecasts that incorporate climate risks and allows to compare the costs and benefits of different resilience options. A key element of the analysis is to quantify the impact of climate risks on the residual value of an asset in the future.

As a corollary to this analysis, investing in resilience should be linked to the insurability of the asset. A non-resilient infrastructure will at some point no longer be insurable, impacting its value, its ability to raise debt finance and ultimately its operations. The implementation of one or several resilience options should reduce the vulnerability of the asset, thus ensuring that it remains insurable. Insurance specialists are developing products that will create such a link and put a price on both physical climate risks and resilience. The publication of a resilience taxonomy by the Climate Bonds Initiative in the next few months will provide a classification of eligible investment measures and activities that have the potential to make a substantial contribution to resilience outcomes. This should be a useful framework for identifying investments in resilient infrastructure.

Third, new funding structures and mechanisms should be designed to mobilize finance for resilience at scale. One concept is the creation of National Resilience Funds. Such funds could both channel domestic and international capital (including from Development Finance Institutions) to resilient infrastructure by way of loans and/or guarantees, and become the conduit through which network, community or system-linked resilience benefits are monetized. Appropriate revenue and tax incentives should be designed to achieve this in an efficient manner. National Resilience Funds would in addition help aggregate investments and fund pipelines of resilient projects.

In conclusion, upscaling financing for infrastructure resilience requires four main actions to be undertaken concomitantly, namely,

• quantify the impact of physical climate risks on real assets and their ecosystems through the use of climate data and appropriate tools or methodologies;
• develop mechanisms to monetize the resilience benefits and adequately allocate them among different stakeholders;
• implement innovative structures to fund investments by de-risking and aggregating resilient measures and activities for infrastructure assets, including through public private partnerships and the use of capital market instruments at the sovereign and sub-sovereign levels; and
• transfer residual risks to the insurance market at a point which broadly corresponds to the intersection between the marginal net benefits of incremental resilience investments and the insurance exceedance probability curve (or other relevant insurance metrics used to determine the optimum point between the cost of incremental vulnerability reduction and the cost of insurance).

Rising to the challenges posed by the financing of infrastructure resilience will require the collaboration of engineering, policy, operations, finance, climate data and insurance specialists working in the sector: that narrative is being heard loud and clear in various infrastructure and climate forums. We now need to develop strategies and implement action plans to make it a reality.

By:

Alexandre Chavarot (Founder & Principal, Climate Finance 2050 Limited)

The views and opinions expressed in this blog are those of the author and do not necessarily reflect those of the Coalition for Disaster Resilient Infrastructure (CDRI).