By Karl Mallon, Founder, XDI (Cross Dependency Initiative)
As the United States grapples with the multifaceted challenges posed by climate change, investors are seeking data on the material risk presented by climate-exacerbated extreme weather events such as hurricanes, wildfires, floods and sea-level rise. In response to this, XDI, a part of The Climate Risk Group, published a global ranking: the XDI Gross Domestic Climate Risk, calculating physical climate risk to the built environment in over 2,600 states and provinces around the world. InvestingESG.org has now integrated those scores and made them available for each U.S. state.
The findings for the United States were stark, and highly relevant for global investors.
● By 2050, more than one sixth of the world’s states and provinces most at risk from extreme weather and climate change will be in the United States.
● After China, the United States has the greatest number of high-risk states in the world, with 18 in the top 100 and 28 in the top 200.
● Florida is the highest-ranking U.S. state, followed by California, Texas, Louisiana, and New York.
● In Massachusetts, Alaska, Rhode Island, South Carolina, Hawaii and Connecticut, the risk of damage more than doubles between 1990 and 2050.
● Sea level rise is the driving hazard, although flooding risk contributes to greater damage in Texas and New Jersey.
The financial cost of physical climate change is already being felt in many U.S. states. The US has experienced 371 weather and climate related disasters since 1980 where overall damages of each event reached or exceeded US$1 billion. The total costs of these events is over US$2.615 trillion and their frequency is increasing. Looking to the future, California’s Fourth Climate Change Assessment, estimates this state alone may experience US$113 billion in annual direct economic impact from climate change by 2050 without adaptation measures.
The findings of the XDI Gross Domestic Climate Risk underscore the importance of pricing physical climate risk in financial markets, including the corporate and sub-sovereign bond markets, given the amount of capital investment represented by the assets at risk in the states identified, the vulnerability of global supply chains, and the need for climate resilience to inform investment.
Since the dataset was published there has been keen interest from investors with financial interests (bonds, investment in long-term physical assets) in high-risk states. Simply put, they’re asking if their money in these locations is safe.
The good news is that adaptation and mitigation efforts do work and engineering solutions – informed and tested using climate risk analysis – exist for many hazards. Measures such as building a sea wall and increasing the height of a levy on a river, updating building codes to resist wildfires, ensuring building codes are being implemented in locations expected to experience hurricanes in the future (not just those experiencing them today) are all possible and are being introduced globally.
The challenge, however, is that so many of the mitigation and adaptation measures required to reduce material risk are dependent on government policy. And ironically, some of the states most at risk are also those opposing regulation of greenhouse gas emissions, and are reluctant to invest in solutions.
Investors are now seeing strong adaptation policies introduced in the US and all over the world, from Australia (introducing wildfire building standards) to the City of London with its sea level rise plan for the Thames barrage. Hong Kong is currently stress testing all of its banks for climate change. US state governments need to be very aware that investors have a choice of bond issuers and industrial centers where climate change adaptation is being taken seriously and that present a safer haven for their capital.
If you are investing in high-risk US states, it’s time to ask some hard questions about climate policy. Here is a state map found on investingesg.org where you can click through to view the risk score for that state.
To learn more about XDI click here.
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