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Ken LaRoe: Need to finance climate adaptation grows with each passing storm
Private sector investment in adaptation is lagging; better data, different outlook on opportunity in the sector is needed.
By Ken LaRoe
(Ken LaRoe is founder, chairman, and CEO of Climate First Bank. He is a serial values-based bank entrepreneur and a leader in ethical banking. Ken sold his first bank, Florida Choice Bank in 2006 after growing it to seven locations and over $400 million in assets. In 2009, Ken started First Green Bank, the first bank in the United States with a stated environmental mission. First Green Bank grew to seven locations with over $800 million in assets before its sale in 2018. In 2021, Ken started Climate First Bank, which has a stated vision to meaningfully contribute to the drawdown of atmospheric CO₂.)
ST. PETERSBURG, Fla. (Callaway Climate Insights) — The 27th Conference of the Parties, COP27, has begun in Egypt. Last year at COP26 in Glasgow countries set goals and plans, while this year’s COP is about following through with those goals. One critical topic of conversation expected at this year’s COP is climate adaptation. Climate adaptation is about developing strategies for coping with the effects of climate change. Climate adaptation efforts include planting trees, green building retrofits, renewable energy infrastructure, and weatherization projects.
Long-term climate adaptation efforts will protect our society from doomsday scenarios like catastrophic flooding events. In the short-term, these efforts will help businesses and communities avoid the massive economic costs of being unprepared for a changing climate.
In late September 2022, Hurricane Ian, the third strongest recorded storm to hit Florida, hit the Gulf Coast with devastating winds up to 150 mph and dumped over 15 inches of rain in some parts of central Florida. The storm left many areas flooded and millions without power. This devastation impacted families, communities, and businesses, forever changing some parts of the state. Babcock Ranch, a community slightly northeast of Fort Myers, one of the hardest hit areas by the storm, is America’s first solar-powered town; it weathered the storm safely with power, water, and internet. While the community incurred minor damage, people returned to their everyday lives quickly, thus illustrating the economic importance of investment in climate adaptation.
Unfortunately, the financing needed to make these investments, nationally and globally, is behind. According to the United Nations Environment Programme (UNEP), climate adaptation investment for developing countries alone is estimated to reach between $140 and $300 billion annually by 2030. However, according to the Climate Policy Initiative, in 2019-2020, only about $46 billion was invested in climate adaptation, of which only a fraction of the investment came from the private sector. More public and private investment is needed, but what is required to convince the private sector to invest in climate adaptation?
The first challenge to overcome to make climate adaptation projects more bankable is increasing access to climate risk and vulnerability data. While this data has become increasingly more common, more of this data is needed and in greater granularity. Climate risk data is important for two reasons; first, it enables companies and communities to understand what adaptation they need to survive and thrive. Second, it is an important tool for financial institutions to understand the project and the investment they are evaluating.
The second major challenge is quantifying the investment return. A common trope is that climate projects have a low return on investment (ROI). However, when looking at a project, there is often a lack of key measurables or metrics to enable a holistic analysis of the investment. A challenge of climate adaptation projects is that they are often unique. Being unique makes it hard for financial institutions to capture, measure, and compare the economic, environmental, and social benefits produced by adaptation investments. To overcome this challenge, standard metrics must be included to enable financial institutions to feel comfortable with the deal and understand the project’s holistic ROI.
Finally, a third major challenge is a flip in mindset. Financial institutions need help understanding the capitalist opportunity. Beyond the necessity of these investments, the growing need for climate adaptation creates an opportunity for new business, protected investments, and long-term business success.
This change in mindset is one area where the Climate First Bank team seeks to lead the way in our home state of Florida. There are two main approaches to changing mindset in the private sector — building awareness and, once that has been achieved, demonstrating financial viability for climate adaptation.
At Climate First Bank, we rely on partnerships to build awareness in the business community. By engaging green-minded builders and architects through the Florida Green Building Coalition (FGBC), we have successfully forged partnerships that allow our team of lenders to educate their customers, commercial building owners, and homeowners on the benefits of green building retrofits. Commercial real estate investors and developers are understandably motivated by the bottom line and rising construction costs across the nation have also narrowed the premium gap between standard construction methods and the higher cost of building with environmental sustainability in mind. This means that for a slightly higher upfront cost, investors and developers can construct new or renovate existing buildings with a substantially lower energy expense — boosting the bottom line or net operating income (NOI), which in turn commands a higher valuation at the time of sale.
Climate First Bank may be a leader in this area, but community banks and credit unions across the country are engaged in the conversation around how they can help move the needle in green construction. By educating clients on the benefits, both to the planet as well as to their wallet, adoption in the private sector will increase exponentially.