Case study by Willis Towers Watson
In the spirit of showcasing leadership and raising standards of responsible investment among all our signatories, we are pleased to publish case studies of all the winning and shortlisted entries for the PRI Awards 2021.
Give a brief overview of your initiative, its objectives, and why you decided to undertake it.
Cross-industry climate initiatives have primarily focused on climate change mitigation. Launched at the UN Climate Action Summit in 2019 – and now a flagship COP26 initiative – the Coalition for Climate Resilient Investment (CCRI) is the first of its kind in bringing together industries and leaders across the finance and investment value chain to complement these efforts and develop practical solutions to advance climate change adaptation and resilience.
A key objective of the private sector-led CCRI is to help investors better understand climate risk and create opportunities to build a network of resilient infrastructure in the most vulnerable and advanced economies, enabling us to better prevent future human and financial disasters. Central to this is CCRI’s commitment to the development and testing of solutions that address a recognised mispricing of physical climate risk in investment decision making and asset valuation processes.
The initiative has been endorsed by both former Bank of England Governor Mark Carney and UK Secretary of State for Business, Energy and Industrial Strategy, and COP26 President Alok Sharma, who have recognised the role it can play in helping to finance climate-resilient infrastructure.
Describe how your initiative is aligned to Active Ownership 2.0, including:
- The significance of the systemic, real-world outcomes it seeks.
- How the initiative uses a variety or combination of stewardship tools/activities to achieve outcomes.
- The theory of change for the initiative (making clear how the initiative intends to drive real world outcomes through use of the selected tools/activities).
- The ambition, ingenuity and/or effort of the initiative.
- How collaboration was used to drive outcomes.
- Any challenges associated with the initiative and how these were overcome.
In 2019, 215 of the world’s biggest companies reported US$1trn was at risk from climate impacts. There is a clear and urgent need to support key incentive structures, such as regulation and credit ratings, to ensure efficient integration of physical climate risk in investment decision making, and with that inform a more efficient allocation of capital towards more resilient investment decision making, economies and societies.
The lack of climate risk standards has resulted in an inefficient allocation of capital when protecting assets from physical climate risk. These are often mispriced, lacking transparency and understanding around climate-related impacts. However, investors, lenders, insurers and ratings agencies need this information to make informed decisions. There is already higher demand for transparency, while improved data analytics and societal pressure will ultimately lead to mandatory disclosure of climate risks. It is only a matter of time before climate risk sits at the centre of all decision-making processes.
CCRI aims for the majority of investments to be resilient by 2025. By 2025, CCRI aims to implement solutions to manage social and economic value at risk and maximise investment in up to 30 OECD and non-OECD economies, through a League of Investment Funds for Resilience. For example, it plans to develop tools and metrics to help governments and decision makers prioritise investment and identify key locations of social, ecosystem and economic value at risk within a given infrastructure network.
CCRI’s Systemic Resilience working group has launched two pilot projects in Jamaica to develop an investment prioritisation tool to enable governments and local policy makers to protect and maximise socio-economic value within infrastructure networks.
Meanwhile, CCRI’s Asset Design and Structuring (ADS) workstream is developing frameworks for risk-informed cashflow modelling practices based on data from a diverse pool of infrastructure assets. CCRI is set to deliver a methodology that integrates physical climate risks in infrastructure asset valuation practices, including cashflow modelling adjustments. CCRI has been developing a set of guidelines to incorporate physical climate risk into infrastructure investment that significantly enhance the availability of climate data and the understanding of physical climate risk exposure by infrastructure asset developers, design and engineering experts, managers, investors and lenders. Their implementation will lead to a repricing of infrastructure assets, with more resilient infrastructure that is able to raise lower cost finance.
CCRI is also developing an innovative financial instrument that recognises and rewards integration of physical climate risks in the investment decision-making process. CCRI members are working closely to structure financial instruments that will mobilise capital towards resilience. Other initiatives supported by CCRI include FAST Infra, the Coalition for Disaster Resilient Infrastructure, and the Task Force on Climate-Related Financial Disclosures to ensure close alignment for a common goal.
Fundamentally, a more accurate pricing of climate risk will create opportunities to build a network of resilient infrastructure globally, enabling us to better prevent future human and financial disasters.
Co-convened by the Global Centre on Adaptation, the World Economic Forum, the World Resources Institute, the UK Government and Willis Towers Watson, and with a growing participant base, CCRI’s membership stands at 95 institutions – including institutional investors, banks, MDBs, insurers, the State of California, and governments of Antigua and Barbuda, Australia, Canada and Jamaica – representing over US$16trn in assets.
Collaboration is at the heart of CCRI’s working groups. The ADS workstream includes 34 private and public sector organisations, collaborating to deliver outcomes in engineering, revenue impact, insurability, cost of capital and asset valuation. CCRI has also achieved impressive cross-collaboration between industries where engineers, climate data providers, credit rating agencies, asset owners and asset managers come together to bring their own views and intellectual property into discussions to advance CCRI outcomes.
Developing a methodology to quantify the economic, social and financial benefits of resilience offers a substantial and critical incentive for financial markets to embed resilience upfront. The main challenge was to mobilise support from CCRI’s founding members by presenting the high commercial potential of specific public good deliverables and, as a result, open up a new market for institutions and industries focused on climate resilience solutions.
To create meaningful research outcomes, CCRI worked with a diverse pool of infrastructure assets representing different classes, geographies and climate hazards. A requirement for full access to engineering studies and financial data has led to confidentiality concerns of case study data providers. To mitigate such concerns, the initiative developed a MOU signed by all participants specifying how data can be used and the legal terms for breach of confidentiality.
The results achieved in the initiative to date, including evaluation of its success against the objectives; any adjustments to plans going forward; any insights learned from this project that can be applied more broadly?
CCRI’s ADS workstream, in collaboration with Mott MacDonald, has developed a physical climate risk assessment methodology that species the required climate analysis, the impact of climate hazards on the asset and the quantification of impacts on the asset’s ley performance indicators. As a result of the analysis, resilience interventions will be developed and assessed. The methodology is developed through six real case studies, to be validated through additional case studies later in the year. In future, the methodology will be published with open access.
Resilience credit quality drivers have been developed by CCRI in collaboration with S&P Market Intelligence, ratings teams and other CCRI supporters, to provide guidance on key risk factors to be considered when calculating the impact of physical climate risk in credit quality assessments of individual projects.
In CCRI’s Jamaica pilot project, systemic resilience and prioritisation tools are being developed in collaboration with the government’s Planning Institute. The tools will help jurisdictions prioritise climate resilient investments based on social and economic value. Key lessons from the project include the criticality in engaging with the right institutions to garner local stakeholder buy-in and the importance of ensuring tools are tailored to the needs of the jurisdiction and that projects contribute to long-term capacity building.