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All Risk, No Reward: The Difficulty of Funding Disaster Mitigation and Climate Adaptation

Principal at Aither

This is the second article in a weeklong series focused on climate-related topics. The first article can be read here.

In the last few years, a number of organizations have called for a substantial increase in investment in measures to mitigate against the risks and consequences of natural disasters and climate change. However, investment in mitigation against risk has been relatively small, slow and uncoordinated.

In Australia, arguments for increases in mitigation spending have been made by the Productivity Commission’s inquiry into Natural Disaster Funding Arrangements, the Red Cross World Disasters Report, the Australian Business Roundtable for Disaster Resilience and Safer Communities white paper and even by the Prime Minister of Australia, Malcolm Turnbull.

The key premise of these arguments is that investing more in mitigation will reduce, in the long term, the level of funding required for disaster recovery. Research undertaken by the Australian Business Roundtable for Disaster Resilience and Safer Communities in 2013 found, for particular events, that for every dollar spent on mitigation, between three and eight dollars is saved in terms of damages avoided.

It is also clear that Australia spends considerably more on recovery than mitigation. Between 2009–10 and 2012–13, AU$11 billion ($8.33 billion) was spent on disaster recovery, while only AU$225 million was spent on mitigation, according to the Productivity Commission in 2015. Estimates as to what the optimal level of mitigation funding should be do vary, and the rationale given for specific figures is often not clear. The Productivity Commission has recommended that Australian government mitigation funding provided to states should increase from AU$26 million to AU$200 million a year and be matched by the states, while the Australian Business Roundtable recommends a $250 million annual fund.

While there is a growing body of evidence to suggest that increased investment in mitigation would be beneficial, little substantial action is being taken. Similar disparity between mitigation and recovery funding is also apparent across the globe. There may be a few reasons why this is the case:

  1. Funding relief and recovery has direct and immediate benefits that are easily identifiable.
  2. The return on investment for mitigation actions is not usually immediate or certain.
  3. The benefits of some mitigation actions can be difficult to measure.

How Should Governments Participate?

For government, it is relatively easy in the aftermath of a disaster to approve funding for shelter, cleanup, business assistance, rebuilding and even psychosocial recovery. On the other hand, getting approval to fund infrastructure strengthening, community education programs, insurance reforms and other mitigation initiatives is much more difficult when the payoff, measured by grateful communities and distant and uncertain savings on future recovery, is uncertain.

In addition, the exact amount of money required for natural disaster mitigation in order to maximize societal benefit would be difficult to estimate. Mitigation actions must compete with other government, business and individual priorities for funding. What seems clear, however, is that more should be invested in mitigation.

The Canadian government is taking steps toward recognizing the importance of mitigation. The Minister of Infrastructure and Communities launched the Disaster Mitigation and Adaptation Fund, a 10-year national program that will invest CA$2 billion ($1.55 billion) in projects that help communities better withstand natural hazards such as floods, wildfires, seismic events and droughts. While this funding is limited to large, $20 million-plus infrastructure projects, it is a good start that will hopefully inspire other governments to follow suit.

Creating an Environment for Private-Sector Participation

Governments are not the only investors facing climate and natural disaster risks. Business and industry also face a number of climate change-related challenges including acute risks such as extreme weather events and chronic risks associated with long-term shifts in climate patterns with impacts, for example, on water availability. Transition risks related to the move to a lower-carbon economy also exist.

Financial markets typically manage risks and opportunities through the allocation of capital, where higher-risk investments are priced accordingly. Yet, this is only possible when information about risks is made available. However, investors currently do not have access to this information and, without it, market adjustments to climate change will be incomplete, late and potentially destabilizing.

In response to this challenge, the Financial Stability Board created a task force on climate-related financial disclosures (TCFD). Its purpose is to develop voluntary, consistent disclosures to help investors, lenders and insurance underwriters manage material climate risks.

The TCFD Recommendations Report was released in June 2017. Recommendations are structured around four thematic areas that represent core elements of how organizations operate: governance, strategy, risk management, and metrics and targets (Figure 1). The four overarching recommendations are supported by recommended disclosures that build out the framework with information that will help investors and others understand how reporting organizations assess climate-related risks and opportunities.

Source: Final Report: Recommendations of the Task Force on Climate-Related Financial Disclosures

Initiatives such as the TCFD are beginning to drive change. The Asset Owners Disclosure Project (AODP), which rates and ranks the world’s largest institutional investors and assesses their response to climate-related risks and opportunities, states that the majority (60 percent) of global investor heavyweights recognize the financial risks of climate change.

However, there is still resistance to recognizing and acting upon climate risks among some Australian businesses. The AODP chairman states that this is primarily due to the short-term focus on financial returns. Alarmingly, the AODP also found that only 6 percent of businesses in the index are considering the risk of stranded assets.

The Australian Prudential Regulation Authority says it is unsafe for companies to ignore the risks of climate change just because there is some uncertainty, or even some controversy, about the policy outlook.

Driving Investor Confidence

There are a number of actions that decision-makers can undertake to drive a more optimal level of mitigation and risk-management investment.

Investors require confidence that their investment will have a positive return. For governments investing in public goods, this means that investments need to provide an overall financial, social and environmental benefit to society. The benefits of potential investments are also weighed against other priorities. For government, this may be investment in health and education. For private investors, these priorities are other investment opportunities.

To drive investor confidence—and therefore give proposals for investment in disaster mitigation—and for the best chance of receiving appropriate funding, the following elements are required:

Information and data. Without good information on hazards and risks it is very difficult for government, businesses and communities to make informed decisions or determine the benefits provided by mitigation investment. There is a clear role for government to develop this information and make it available to the wider community. Information and data of this nature also provides a valuable baseline against which to measure the success of mitigation actions.

A risk-assessment framework. A regional- and state-scale disaster risk-assessment framework (for government) or a business-wide or sector framework for a business will help investors adopt a more strategic approach to disaster management. It is also an integral tool for identifying priorities and communicating risk and risk-management approaches with stakeholders.

Clear objectives and outcomes. Setting clear objectives and time-bound outcomes allows investors to focus on a tangible future state and see clear links between funding specific actions and the expected return on the investment.

A cost-benefit framework. Having a standard or rapid assessment framework for articulating the costs and benefits of mitigation options is an important decision-making and communication tool. A cost-benefit analysis allows for like-for-like comparisons across investment options, providing a solid basis for prioritization. Such calculations are also important for highlighting the values at risk if mitigation action is not undertaken.

Monitoring and adaptive management. Monitoring of indicators should provide the data upon which investment performance stories can be articulated, highlighting successful progress. Adaptive management approaches should be employed to alter interventions to meet the required objectives, if appropriate.

Going Forward

All levels of government, business and individuals have a role in mitigating against natural disasters and adapting to climate change. Governments set roles and responsibilities through policy, legislation and regulation. Government action is also heavily influenced by community expectation. The roles of business are set by government, through regulation, and investors through market signals.

Clarifying the roles of business and government will drive accountability for funding and investment in disaster mitigation, which in turn will result in more action being taken. Clearer roles for business will also make investors more confident that they can make long-term investment decisions.

While the roles of government and business in this area are still unclear, the signals to undertake action and make investments in disaster mitigation and climate adaptation are only getting stronger. The challenge is to get the investment at the right scale and targeted to where it will have the biggest positive impact.

Martijn Gough

Principal at Aither

Martijn Gough is an economist and public policy expert with significant experience in climate change and natural resource management. He began his career at the Department of Treasury and Finance working on drought, water and climate adaptation policy. Martijn also worked for United Nations Development Programme where he led a number of climate change projects and worked with Yale University on a practical economics of adaptation toolkit. He now works for the consultancy Aither and continues to lead projects for State and local governments on climate change adaptation and disaster risk reduction.

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