In the concluding chapter of this three-part series on physical climate risk challenges in the housing ecosystem, CoreLogic® and BCG® explore the challenges and opportunities related to adaptation and resilience.
Climate change is undeniably one of the greatest challenges of our time, presenting myriad risks that threaten the stability and wellbeing of communities around the world. With the effects of climate change become increasingly apparent, the urgency to address its impacts and enhance our ability to adapt and respond is becoming an increasingly pressing issue.
As the climate changes, the housing economy will be affected, whether we are ready or not. And major changes are already occurring. Already, insurance companies that once covered homes are no longer writing new policies in some states.
But adaptation and resilience solutions exist, which gives us an opportunity to get ahead of the challenges to come.
Defining Adaptation and Resilience to Climate Change-Driven Physical Risk
Adaptation, as defined by the Intergovernmental Panel on Climate Change (IPCC), involves the “process of adjustment to actual or expected climate and its effects.”
On the other hand, the IPCC defines resilience as “the capacity of social, economic, and environmental systems to cope with hazardous events or trends. It involves responding or reorganizing in ways that maintain essential functions, identities, and structures, while also enabling adaptation, learning, and transformation.”
The need for adaptation and resilience solutions has reached a critical point, with the World Economic Forum’s Global Risks Report for 2023 ranking the failure of climate change adaptation as the second-greatest risk for companies over the next decade. The implications of this risk are profound, encompassing individuals, businesses, and entire communities.
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Key Challenges Across the Adaptation and Resilience Project Lifecycle
As organizations and municipalities look to develop adaptation and resilience projects, they must be aware of the threats that can impede progress and look for opportunities to address them.
Prioritization: Balancing efforts between reducing CO2 emissions (mitigation) and implementing adaptation and resilience solutions is a delicate task. Green finance is dominated by mitigation, with adaptation accounting for only 4% of green bonds spent in 2021. Certainly, all these solutions need support, and with limited funds available, knowing which projects will have the greatest impact is crucial.
Assessment: Each adaptation or resilience project is unique, influenced by factors such as geography, exposure, vulnerability, and local social and cultural systems. The lack of standardized assessments and access to reliable data hinders effective project prioritization, further complicated by the constantly evolving climate.
Return on Investment: The return on investment for adaptation and resilience projects is not always clear or immediate. Projects vary in complexity, making it challenging to measure their long-term benefits within a short time frame.
Capital Allocation: Often, capital is not allocated to projects with the highest impact or greatest need. Thorough research is essential to identify and prioritize projects that will yield the most significant benefits.
Pace of Change: Licensing for projects can face delays due to environmental reports and local challenges such as legal, political, and social opposition. The complexity of adaptation plans spanning large areas adds further challenges in understanding roles and responsibilities at various levels of governance.
The Supportive Role of Institutions and Government-Sponsored Entities (GSEs)
Amid these challenges, institutions and GSEs play a pivotal role in driving adaptation and resilience efforts.
Educating Homeowners: Empowering homeowners with information and technical assistance is imperative. Educating them about how their assets are vulnerable to climate-related risks as well as raising awareness about government programs and incentives can encourage proactive engagement in adaptation measures.
Innovating Financial Products: Introducing financial products that support adaptation and resilience, such as adaptation retrofit loans, helps customers make informed decisions. Insurers can offer rate adjustments based on homeowners’ actions to enhance property resilience. And sometimes, small changes to a home can mean the difference between minor damage and complete destruction or default.
Partnering With Asset Owners: Collaborating with private companies that own properties in vulnerable areas enables GSEs, banks, and insurers to provide financing for infrastructure development that mitigates climate risk.
Public-Private Partnerships: Leveraging public-private partnerships for financing and managing adaptation and resilience infrastructure can be highly effective. Financial institutions’ involvement in issuing municipal bonds for such initiatives is vital.
Data and Analytics: GSEs, banks, and insurers possess valuable proprietary data and analytical capabilities that can support stakeholders in effectively planning and executing adaptation and resilience projects.
Advocating for Policies: Advocacy efforts aimed at promoting adaptation and resilience are crucial. Banks and insurers can push for updated building codes and mandatory climate risk assessments to ensure community-wide preparedness.
Taking Action to Create a Resilient Future for People and the Property Market
The challenges posed by climate change are formidable, but there are solutions within reach. By recognizing the urgent need for adaptation and resilience investments, fostering collaboration among stakeholders, and leveraging the strengths of GSEs and financial institutions, we can collectively navigate the changing climate landscape.
In the concluding chapter of this series, BCG and CoreLogic emphasize that it is through the combined efforts of individuals, communities, businesses, and policymakers that will ultimately shape our ability to thrive in the face of climate risk. Let us seize this opportunity to adapt, build resilience, and secure a sustainable future for generations to come.