22.6.2022

Media

IPE Real Assets

The article below was first published in IPE Real Assets.

21 June, 2022

The planet is heating up and, as it does, the climate pledges of infrastructure companies and their investors are also evolving. There is much debate around the cost and difficulty of the green transition, who is going about it genuinely and who isn’t, and investors across all asset classes are keeping a beady eye on progress.

Less is heard, however, about the opportunities and business benefits for companies in the sector to use nature itself as foundation for ‘green infrastructure’. The loss of coastal ecosystems, such as mangroves and coral reefs, which provide natural barriers against extreme weather, is leaving real assets more exposed to the effects of climate change. This makes rising insurance premiums a key investment risk for physical infrastructure.

Queensland, Australia provides a case in point: average insurance premiums have increased by over 80% in the past 15 years, because of the high proportion of infrastructure and population exposed to coastal hazards such as cyclones and storm surges.

So, what if we were to harness nature in a way that makes business sense as well as sustaining the planet?

Restoring nature is a powerful tool for companies to achieve net zero and build resilience. Mangroves not only store vast amounts of carbon in their root systems; they also save an estimated $65bn (€61.9bn) a year in avoided losses from storms and floods, acting as coastal defences that reduce wave impact.

This is part of Earth Security’s approach to business innovation, as seen in new research published this week; a simplified quantitative risk model for re/insurance to embed the dollar value of the climate protection of mangroves in the insurance products and premiums offered to infrastructure projects and other real assets.

Because these deep-rooted forests provide robust protection against storms and floods along shorelines, harnessing their value offers a huge step forward for the owners of physical infrastructure in coastal areas to reduce damages and costs. Among other benefits, mangrove forests could help the re/insurance industry to keep assets insurable.

The benefits work both ways: re/insurers can support their clients’ green transition by providing premium discounts for infrastructure and real assets that choose to protect and restore mangroves as a way of lowering their risk exposure. This provides investors with the type of practical solutions needed to manage their physical climate risks, as discussed at the IPE Real Estate conference in Amsterdam last month.

Re/insurance, a global industry with clients across every sector and particularly important ones in physical assets, has so far struggled to make any meaningful transition to sustainability or provide insurance products that incentivise and support change in their clients.

Caution and prudence, of course, run through the industry’s DNA, but that very caution means it is difficult to change opaque risk modelling methodologies used to calculate insurance premiums for their clients. Current risk models look backwards at historical data, so they incorporate neither climate-change scenarios nor the risk-attenuation possibilities of natural ecosystems. We offer a method to update this system.

Our research takes available science and public datasets to build a business case for innovation in re/insurance products, insurance regulations and sustainable investments. We suggest new product routes for re/ insurers, companies and governments, using the protective power of mangroves as a base.

Our report focuses on five coastal cities in the Philippines, one of the world’s most climate-vulnerable countries. For the first time it provides a simplified model to quantify the economic losses from cyclones, which can be avoided by underpinning and developing mangroves – the forest type most prone to deforestation.

Studies in the Philippines show mangroves to be 50 times more cost-effective at resisting storms over a 15-year investment period than a built concrete seawall. What’s more, rather than being carbon-intensive they store carbon in the process, enhancing marine biodiversity and increasing the income and sustainability of local fisherfolk communities. The alternative is a ‘green-grey infrastructure’ solution, combining ecological and man-made factors for potent results across economic sectors.

Bolder collaboration

Growing losses from storms and floods are a clear global trend and re/insured losses are expected to grow by a factor of 10 in the next decade. Governments and re/insurers must direct investments towards sustainability to avoid assets becoming uninsurable.

Using nature-based solutions to build resilience and keep insurance premiums within manageable levels is in the business interest of project developers, real asset investors and re/insurance companies.

As the climate problem becomes more pressing, re/insurers will have a growing role in the viability of real asset investments. They are also long-term strategic investors in infrastructure. Everything from risk-modelling to commercial partnerships and product innovation need top-to-bottom adjustment to address these burgeoning risks and prepare for an uncertain future.

History is at a key juncture in which climate change will demand bolder solutions and collaboration. By supporting initiatives to tap into the value of natural assets, infrastructure investors can facilitate a more sustainable and resilient planet for all of us.

Find more strategic reports here.