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Interactive Risk Tracking is a Foundation for Resilient Prosperity

Tracking of interacting compounding risks shows higher value of financing external returns.

Resilience is the ability to weather and emerge from shock events. Resilience intelligence is the complex work of understanding whether we are positioned to do so. Structured, evolving guidance, rooted in Earth systems science, is critical for achieving reliable ongoing operational resilience.

The Resilience Intel initiative is a coalition effort to aggregate climate-smart finance commitments and opportunities, grade the climate intelligence of investments of any kind, at any level, and map finance and investment to scientific observations about the health of Earth systems. To achieve 100% climate-smart finance — where we no longer invest in the degradation of vital natural systems — we need to engage a diverse landscape of actors in an integrated process of learning.

The end product will be a service that allows better understanding of particular stories of risk and opportunity, to ensure operational resilience intelligence is a routine element of everyday decision-making in policy, commerce, and finance.

Climate Risk Affects Everyone

Last Spring, we published a report on Interactive Risk Tracking to Finance Resilient Prosperity. We did this, because it is not entirely obvious how readily and immediately climate risk and resilience questions fit into mainstream financial concerns, unless you account for the hidden value-creating or value-destroying effects of interacting compounding nonlinear risks.

In other words, everything affects everything else, to some degree, through connected systems like the climate, and that determines the value of any given dollar of investment. The more resilient we are, the steadier the foundation for investment and profitability; the less resilient, the greater the risk of catastrophic failure of some segment of the value chain.

In its Global Risks Report for 2020, the World Economic Forum found all 5 leading areas of global risk, in terms of likelihood, relate to climate and environment:

  1. Extreme weather
  2. Climate action failure
  3. Natural disasters
  4. Biodiversity loss
  5. Human-made environmental disasters

All 5 of these are also in the top 10 global risks in terms of impact.

Macrocritical resilience is increasingly the unspoken operational imperative shaping the future landscape of opportunity and prosperity. To put this in simpler terms:

We are dependent on delicate complex systems that interact to make our world more livable. We are—whether we pay attention to it or not—invested in each other’s Earth-systems intelligence.

Whether you can do well in the future will depend on many factors outside of any one person or entity’s direct control. This is why connections between Earth-systems science platforms, financial and socio-economic data systems, our lived, everyday reality, and complex interacting risk-and-resilience dynamics, are vital for determining how we can best build value going forward.

It is with this in mind we publish below an updated edition of our report “Interactive Risk Tracking to Finance Resilient Prosperity”.

Interactive Risk Tracking

Assessing risk is a notoriously tricky business. When risk is high enough to be a 50-50 chance situation, assessment is not normally required; the risk is obvious, and precautions become a priority. When probability of crisis is lower, but costs could be both significant and attached to nonlinear influences, risk assessment becomes vital for understanding both the level of vulnerability and the most effective strategy for achieving resilience.

To achieve meaningful resilience intelligence, we need to find ways to make previously invisible value-building or value-eroding trends visible, so everyday decision-making amounts to smarter future-building.

The IPCC’s Special Report on Global Warming of 1.5ºC — requested by the 21st Conference of the Parties to the U.N. Framework Convention on Climate Change, in Paris in 2015, and released in October 2018 — shows the risks to humanity and natural systems from warming of 1.5ºC or higher are unacceptable and unaffordable. In other words, there is not enough money in circulation to deal with the ramifications of interacting compounding Earth system impacts, without significant degradation of living standards, and so of generalized security and prosperity.

The IPCC further detailed the escalating threat of extreme climate disruption with two Special Reports in 2019:

  • Climate Change and Land—on climate change, desertification, land degradation, sustainable land management, food security, and greenhouse gas fluxes in terrestrial ecosystems, and
  • The Ocean and Cryosphere in a Changing Climate.

These reports describe a rapidly worsening series of interactions between human industry, the atmosphere, melting ice, watersheds, and land and ocean ecosystems. Together with the IPBES report on biodiversity loss, and the UNEP Emissions Gap Report, these major science reports produce what is, from the Resilience Intel perspective, an overarching science-based insight:

Complex interacting risks are worsening, and we are not acting fast enough, or with enough intelligence and collaboration, to avoid the worst.

Safeguarding Opportunity from Situational Risk

All value everywhere now carries risk tied to planetary systems. The specific character of the risk plays out differently in different contexts, and then those risks compound through critical interactions. The 17 Sustainable Development Goals provide a detailed map of those diverse interactions, at all levels.

To achieve resilience against the risk of failure of climate change mitigation and adaptation efforts, we must initiate and sustain serious, fast-paced, multilevel innovation and action toward Sustainable Development Goal 1 (SDG1) — No Poverty.

  • In densely populated, rapidly developing countries like China and India, increasing investment in renewable energy generates hundreds of thousands of clean energy jobs — in fields as diverse as research, engineering, construction, sales, and installation.
  • Many construction and installation jobs will go to unskilled and semi-skilled labor, providing a pathway out of poverty for millions of people in rural and under-developed regions.

Building resilience against the risks of extreme weather events means building on SDG8 — Decent Work and Economic Growth.

  • The intensity and frequency of extreme weather events around the world is increasing every year. The North Atlantic Hurricane Season of 2017 was the most costly hurricane season on record. Hurricanes interrupt and reduce industrial production, increase unemployment, disrupt labor markets and supply-chain infrastructures, and incur other high costs.
  • The U.S. National Oceanic and Atmospheric Administration (NOAA) reports that coastal shoreline counties — which host 40% of America’s jobs and are responsible for 46% of its GDP — are very susceptible to extreme weather events like hurricanes.
  • Extreme weather — not only cyclonic storms, but also floods, droughts, and wildfires — will pose an escalating threat to the social and industrial resilience of communities around the world, thus affecting inclusive and sustainable economic growth.

Similarly, building resilience against the risks of biodiversity loss and ecosystem collapse means building on SDG1 (No Poverty), SDG2 (Zero Hunger), SDG3 (Human Health), SDG10 (Responsible Consumption), and SDG14 (Life in the Ocean). Operational resilience intelligence means mapping upstream-downstream connections , as well as other vital teleconnections between distinct regions and sectors, as well as between generations.

Aggregating Climate-Smart Finance

Finance is the projection of current wealth into future scenarios. One measure of financial return on investment is that the money value held by the investor, in specific relation to that investment, ends up being more than at the outset of the investment. Another measure of financial return is that the integral decision-making of an institution, over time, secures added command of resources in a number of specific areas. Limiting our evaluation of the value of financial decision-making to these two metrics makes it more difficult to assess, and therefore capitalize on, the climate-specific value of any given investment.

Climate-related investment generates both internal investment value and also external co-benefits. Because we have not had to test these co-benefits historically, the degree to which external returns on investment flow to and benefit investors tends to be greatly underestimated.

Initial climate-smart finance aggregation work for Resilience Intel finds more than $6 trillion* in already committed financial resources from the public and private sectors and from multilateral development banks. Revealing this vast pool of financial resources programmed to deliver measurable co-benefits should give confidence to major investors and small-business owners, as well as to cities and other public-sector and institutional investors, that coordinated alignment with climate-smart opportunities is the safest bet.

External Returns on Investment

These external returns on investment (XROI) can be higher value than the whole internal business activity of a given enterprise or portfolio. Lack of visibility leads to the assumption that XROI does not equate directly to bottom-line internal ROI. As these value-building interactions become visible, and the wider resilience value of specific investment decisions becomes more apparent, the competitive advantage that comes with achieving a higher XROI becomes clearer to more market actors and is consolidated.

Maximizing XROI through a shift to climate-smart finance connected to other everyday concerns is the most effective way for investors at all levels to avoid risk, connect to new opportunity, improve progress toward (operational, socio-political and environmental) sustainability goals, and ensure broader and deeper-rooted future market relevance. Climate intelligence is a direct path to future value.

This report was produced by the Resilience Intel team, with extensive background research by Resilience Intelligence Fellow Shantanu Agrawal.

For more information

UPDATE — January 22, 2020

  • An earlier edition of this brief cited “more than $2 trillion” in aggregated climate-smart finance.
  • By May 2019, ongoing aggregation work had identified $3.56 trillion in already committed resources.
  • In November 2019, Bloomberg published the updated Resilience Intel aggregate, tracking $5.48 trillion in climate-smart finance commitments.
  • At this writing, the Resilience Intel aggregate now stands at $6.08 trillion (with $600 billion in new commitments added in the last 8 weeks).
  • This aggregate will continue to evolve.
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