Rethinking climate finance to improve infrastructure resilience:
The consequences of a changing climate are no longer hypothetical. Extreme events such as hurricanes, droughts, fires, and frosts occur with greater frequency and intensity each year, destroying homes, businesses and damaging the natural world. Chronic challenges such as gradually rising temperatures, rains, and floods all contribute to stress. Minimizing and adjusting these effects should be a priority for all government units and all sectors of the economy.
According to a government order from May Biden, financial markets are one of the most powerful ways to drive public and private action on climate resistance. The regulation calls on the Office of Management and Budget, the Department of the Treasury, and other federal agencies to better measure and address the financial risks of climate change.
The core of the mandate is that federal agencies and corporations, including financial services and insurance companies, proactively consider and address climate risks, including physical destruction of buildings and the disruption of business operations. It can “promote the flow of capital into climate-oriented investments rather than carbon-free investments,” as the White House said in April.
This type of “climate accounting” is based on similar strategies developed by other countries and companies. And like her peers, the Biden administration is betting that stricter financial principles and regulations could force financial markets to pay the costs of climate change and lead to more resilient investments. Combined with other steps outlined in the executive order, including new home loan rules and new federal rules for purchasing equipment, the ultimate goal and impact could be huge.
While the request is a step in the right direction, it omits many details on the types of financial institutions and capital flows.
explores key opportunities for investing in more resilient infrastructure.
The implementing decree does not address a number of climate-related perturbations that expose our built environment, including our transportation, water, and fixed assets, to additional risks and costs. First, the failure of communities to consistently measure or assess the negative impacts of a more destructive climate (or the positive impacts of more proactive climate action) is a significant market failure.
The attribution emphasizes the importance of measurement but does not specifically link it to our built environment. Second, the lack of mature financial regulation for markets to protect assets in our built environment is a major political failure; attribution does not provide a basis for identifying or consistently investing in specific projects that can increase our climate resilience. Together, these two shortcomings limit our ability to make more climate investments that can protect and benefit more people and places.
Better financial market design, transparency, and oversight are essential to correct these errors, reduce costs and reap new benefits. We know this approach to using financial market principles can work: the creation of the Securities and Exchange Commission (SEC) during the Great Depression allowed for greater measurability and investor protection when trading stocks and other securities. The current threat of climate change should also encourage us to explore new ways in which financial markets can invest in greater resilience.
THE NEED FOR CLIMATE INVESTMENTS IN BUILDINGS
How and where we invest in three specific sectors of our built environment – transportation networks, water systems, and private fixed assets – has a major impact on greenhouse gas (GHG) emissions and our overall climate risks. While the United States must shift to cleaner energy sources, federal and local leaders cannot ignore all the unsustainable projects and destructive growth patterns in our built environment. Our self-directed and extensive development has flooded the earth, consumed energy, and exposed us to various climatic threats.
For example, transportation and commercial and residential buildings are responsible for 42% of greenhouse gas emissions. This soil development model also poses other climate challenges, such as heat and the risk of flooding and other impenetrable surfaces.