Climate risk demands a fresh take on investment return

To unlock the flow of capital needed for climate adaptation and resilience projects, re/insurance principles must be placed at the heart of global finance, according to Dr Nicola Ranger, director of the Resilient Planet Finance Lab at the University of Oxford and co-chair of the Resilient Planet Data Hub (RPDH).

An accelerator research and innovation programme, the Lab sits with the RPDH under the Resilient Planet Initiative (RPI) being developed by the UN Climate Change High-Level Champions.

In an interview with Insurance Day, Ranger stresses the value not only of risk metrics but impact metrics.

“We’re used to talking about the negative externalities for climate mitigation. Paying a price for the negative impact your actions have on others. But we need to start talking more about pricing in the positive impact of adaptation. To accelerate adaptation, I want to see the industry lead in pricing in the positive externalities of insurance and investing in resilience, as well as the risks of climate change,” Ranger says.

“The traditional insurance mindset is how to measure loss reduction – when we buy an insurance policy or invest in resilience, the story is always the risks that will be avoided,” she continues. “But this story is failing us – both the industry and society. We need to flip that mindset on its head and start building a set of metrics that capture the positive benefits of adaptation both for the insured and wider society. Insurance and adaptation are fundamentally positive investments with substantial ROIs [returns on investment] – unlocking investments, jobs, poverty alleviation or food security."

A mangrove forest in Bangladesh Cyrille REDOR/Alamy Stock Photo

Ranger says she and her colleagues are already doing this. To mobilise finance into mangroves, for example, they are building a set of metrics for insurers and investors that capture the potential positive return on investment for business, local communities and government. From there, they can work with financiers and governments to structure ways to mobilise finance effectively, she adds.

Mark Carney’s challenge

The RPDH began as the Global Resilience Index Initiative (GRII), which was launched at Cop26 by six founding partners, including three co-chairs from the Insurance Development Forum (IDF), the University of Oxford, and the UN Office for Disaster Risk Reduction. The initiative was supported by technical partners, such as the Global Earthquake Model Foundation and Oasis Loss Modelling Framework with their open data architectures.

The GRII was their response to the challenge set by Mark Carney, the former Bank of England governor, when he galvanised the finance community in time for the climate talks in Glasgow. Carney asked the IDF to come up with a metric that financial institutions could use to price risk and assess different adaptation options.

Mitigation efforts, Carney argued, had a clear metric – a tonne of carbon – but adaptation did not. Enter the GRII to plug the information gap for aggregated risk decision-making and the guidance of capital flows towards resilience.

Ahead of Cop28, the GRII forged a partnership with the UN Climate Change High-Level Champions team to develop a transparent, freely available and globally consistent view of physical climate risk. Their participation in a “design sprint”, hosted by Google at Climate Week NYC, led to the creation of the Resilient Planet Initiative.

This development renamed the GRII to RPDH and led to the creation of the Resilient Planet Finance Lab to seek ways to mobilise finance for adaptation. The RPDH is thus now defined as a data service that includes future climate risk insight under the UN headings of “people, planet and prosperity”. The Oxford team recently launched a new partnership with the Howden Foundation to build the next generation of metrics needed for adaptation with a focus on “people and planet”.

The RPI’s aim for Cop29 is to launch a toolkit that brings data together with solutions. A recommended set of metrics will thus mark the RPDH’s move into “operational service”.

Ranger explains: “This year we’re going from the enormous amount of knowledge that we have built up, to a set of key metrics that are not only consistent with the needs of new regulations but can also guide financial flows towards areas that build resilience, such as resilient infrastructure, natural capital and agricultural systems.

“Boiling everything down to one metric is extremely difficult but we want to be able to show a set of core metrics around risk and impact in the context of people, planet and prosperity,” she adds.

Blueprint for investment

A key milestone on the road to Cop29 is the blueprint for investment in resilient architecture recently announced by the IDF in collaboration with global asset manager BlackRock.

“This is exactly the type of initiative needed from the re/insurance industry to turn the dial on adaptation,” Ranger says. It is also the latest example, she adds, of the “catalytic” role the IDF is playing in mobilising the strengths of the industry – risk expertise, investment capital and underwriting – to reach the heart of the UN’s climate and sustainable development goals.

The aim of the blueprint is to help make the $2.7trn that is invested in infrastructure globally each year resilient, Ranger stresses, and to bring another $1trn into infrastructure in emerging and developing economies, including renewable energy, water, schools, hospitals and transport.

“I hugely congratulate the IDF on this critical new initiative,” Ranger says. “I hope to see it crowd in adaptation-aligned capital at scale from the industry as well as leverage the industry’s wider strengths in risk knowledge and underwriting.”

Having worked on climate risk in a wide variety of contexts, including academia, government, banking and insurance, Ranger urges a holistic approach.

“A big part of our work at the Resilient Planet Initiative is not just to support communities on the ground, but how to embed risk into the whole financial system. It’s about taking insurance principles and applying them to banking, pensions and other areas of investment so that we get the whole system supporting adaptation.”

“The traditional insurance mindset is how to measure loss reduction – when we buy an insurance policy or invest in resilience, the story is always the risks that will be avoided. But this story is failing us – both the industry and society. We need to flip that mindset on its head and start building a set of metrics that capture the positive benefits of adaptation both for the insured and wider society"

^{Dr Nicola Ranger
Resilient Planet Finance Lab, University of Oxford}

The true value of investment in adaptation can clearly be seen in projects that are linked to nature, which is itself a form of infrastructure, she continues. “We’ve been looking at how to quantify and model the benefits of nature in terms of loss reduction, such as for our projects in Jamaica and Bangladesh,” she adds.

Ranger warns against seeing the concepts of mitigation, adaptation and resilience as separate entities in the real world. “It’s still frustrating for me that they aren’t being connected more,” she says.

“By integrating them, we can design projects that give both the mitigation and adaptation benefits, as well as the societal benefit. However, at a global level, we still disconnect them far too much and in policy there are far too clear lines drawn between them.”

Another source of frustration is how adaptation is seen as a failure to tackle mitigation. “I’ve even heard some people say they’re scared to talk about adaptation because it will make them seem defeatist,” Ranger says. “That’s the wrong attitude because if we don’t do both, then there’s no way we can tackle this enormous risk.”

The role of re/insurers in driving investment towards climate projects cannot be overstated, she stresses. With about $40trn in assets under management, insurers are themselves a significant part of global capital, she says. And reinsurers should be playing their part in ensuring investments “build and not negate” resilience, she adds.

The success of the RPI will be measured, then, not merely by re/insurers using the toolkit it offers, but also by their willingness to spur efforts to have climate risk embedded into the whole financial system.

Ranger says: “If our initiative can actually catalyse that bigger change then that, for me and the other co-chairs, would be success.”

Quantifying nature loss

Ranger is also director for “greening finance” at the UK Integrating Finance and Biodiversity Programme and one of the lead authors of a recent report that analyses the impact of the degradation of natural ecosystems.

The report – Assessing the materiality of nature-related financial risks for the UK – presents the first quantitative evidence of the economic risk posed by nature degradation and the erosion of ecosystem services, both domestically and internationally, to the UK economy.

Damage to the natural environment is slowing the UK economy, the report says, and could lead to an estimated 12% reduction to GDP in the years ahead – larger than the hit to GDP from the global financial crisis or Covid-19.

In addition, the report considers how this economic risk to GDP could translate into risk for the financial sector, as an indication of the potential impact of nature-related risk on financial resilience.

Ranger says: “Over the past decade, central banks and financial institutions woke up to the risks posed by climate change and we’ve seen meaningful steps to address them, including mandating disclosures, and beginning to shift capital flows toward green sectors and technologies.”

She concludes: “With this report, we comprehensively demonstrate that risks from environmental degradation and biodiversity loss are at least as severe and urgent, and indeed that, if not addressed, will double climate change losses.”