From Spongy Parks to Oyster Reefs, Investors Are Funding Ways to Adapt to Climate Change

Wall Street Journal

4 days ago

WASHINGTON—On a muggy July morning, the day after a thunderstorm hammered parts of this city, a tiny triangular patch of land built to drain stormwater had done its job. The designers had adapted the landscape to manage rushing rainwater, soaking up the excess like a sponge.
The drainage project in D.C., near the sprawling Rock Creek Park, is part of a growing category of finance focused on risk adaptation, aimed at dealing with the impacts of extreme weather such as heavy rainfall, drought, wildfire and heat waves happening in greater frequency and intensity.
French investment bank BNP Paribas estimates the climate-adaptation market could be worth some $2 trillion by 2026. It's becoming increasingly sought after, not just in D.C. but in locations across the U.S. hit by more frequent bouts of extreme weather.
'If you're a homeowner, or a factory owner in California, there's not much you can do yourself about the climate and the weather which is going to hit you over the next few years,' said Rowan Douglas, chief executive of climate risk and resilience at insurance group Howden. 'The only thing you can do and what governments will need to do is reduce your vulnerabilities, which is another way of saying adaptation.'
Like many parts of America, the capital regularly has to cope with the effects of heavy rainfall. The National Weather Service in the D.C. area has issued eight flash flood warnings so far this year—the most during this timeframe since 2006.
'In these big, flashy storms, where we just get completely inundated very rapidly, we want to capture as much of that water as possible,' said Seth Charde, senior manager of green infrastructure at DC Water, the city's water utility.
To manage rainwater and sewage overflow, designers built a bridge-like walkway over a narrow, stone rainwater path along with permeable pavement and an underground water drainage system. The grass-lined park acts like a sponge soaking up a spill; it helps slow down rushing water, allowing it to seep beneath the ground where it pools between stones before permeating the surrounding area.
'You tend not to be investing to generate an income,' said Douglas. 'You're investing to avoid a loss—that often is a bit harder in terms of developing a business case. You often don't have anything to show for it until the flood happens, but fortunately your community wasn't flooded because of the investment.'
However, for those pushing the new investment area, protecting existing infrastructure is key. Sierra Club, a U.S.-based environmental group, estimates the global economy could face annual losses exceeding $38 trillion by midcentury because of the effects of climate change. Now is the time to deal with those effects, rather than try to stop them happening, it says.
In the U.S. this year, wildfires in California and floods in Texas have taken hundreds of lives and cost billions of dollars in damage This follows hurricanes battering Florida and North Carolina last year. In Europe, parts of the continent are experiencing one of the hottest summers on record.
'The experience that many have had over the last 12 months certainly adds a bit of caution in terms of expectations of how quickly we are actually going to mitigate—and that has amplified people's expectations about adaptation needs,' said Zoe Whitton, head of strategy and impact and climate-change-focused consulting firm Pollination.
She said that infrastructure investors have been one of the key groups pushing for changes in how projects are funded in an effort to avoid losses in places like ports and transportation. Some are turning to natural solutions.
One example can be found in the waters of the Chesapeake Bay in eastern Virginia where the Oyster Carbon Company is looking to use the natural abilities of the mollusk to break storm surges and reduce flooding in the state.
'When you look at climate adaptation, everybody talks about the gray infrastructure, raising seawalls, shoring up ports,' said Chandler Van Voorhis, co-founder of ACRE Investment Management, which is investing in the project.
However, Van Voorhis said green infrastructure projects such as expanding wetlands and building oyster banks can be just as effective in restoring and protecting shorelines.
In the case of the oysters, they are taken from nurseries and once they are old enough and then allowed to grow in cages or on ropes to mature where eventually they can be used as flood defenses within the river estuary system, acting as storm breaks when floods occur. At the same time, oysters also naturally filter water, sequestering carbon as they grow.
Protecting the shoreline is a particular concern for logistics operators in the region, including Norfolk Southern, a railroad and freight operator which recently unveiled an $85 billion merger deal with Union Pacific. It invested in oyster banks around Lambert's Point in an attempt to mitigate the risks of flooding posed to a marine terminal nearby.
Van Voorhis added part of his financing comes from selling carbon credits in the project. 'Here you're in an area that's very rural, so you don't have a lot of the negative impacts to create the demand side of it, but with the carbon it's truly a global market.'
For the insurance industry, investors waking up to adaptation finance couldn't have happened sooner. Worries are on the rise over insurance deserts—swaths of land that are either deemed uninsurable or where the premiums rise beyond affordability, effectively giving the same effect. Howden's Douglas highlighted regions like Florida and California in the U.S. and Queensland in Australia as areas where insurers are already pulling out of coverage for housing and property.
'Climate change has obviously been a major loss and has been a major factor [in losing coverage], and this concern about insurability has led to a sudden recognition about what lack of insurance can mean in terms of valuations of property and future liquidity,' Douglas said.
The Union of Concerned Scientists estimates that by 2100, some 2.4 million homes in the U.S. could be at risk of flooding from rising sea levels, with homes in Florida and California particularly vulnerable. However, it says that two million of those homes could be saved if adaptation efforts are stepped up.
Outside of housing and infrastructure, another key area of worry is the agricultural industry. The European Commission, alongside Howden, recently published a report highlighting the risk drought and frost pose to European farming. It estimated there could be a 42% to 66% increase in annual losses, amounting to EUR40 billion ($46.78 billion) by 2050. The European Union has committed funding to support climate adaptation.
A recent report from the Barcelona Supercomputing Center found prices for staple foods such as potatoes, rice, onions, lettuce and fruit are being hit by price shocks, and saw huge surges recently due to extreme weather. Likewise, olive farmers in Greece, Spain and Italy have also seen huge losses in recent years, with prices for olive oil rising sharply.
Catherine Godschalk, chief investment officer at Calvert Capital, which helped fund the Washington park project, emphasized the importance of resiliency efforts for extreme weather, 'whether that's rainfall exceeding the capacity of water systems in D.C., or the risk of wildfires in California.'
The Rock Creek Project was funded by a $25 million environmental impact bond in 2016, sold to Goldman Sachs Urban Investment Group alongside Calvert Impact Capital. Calvert has backed other environmental projects, including through a loan for a forest resilience bond for the upfront costs of forest restoration.
In the face of climate change, projects like these are a 'critical part of the broader resilience that we need to be building,' Godschalk said.
Write to Yusuf Khan at [e-mail] and Clara Hudson at [e-mail]