Document Type

Article

Publication Date

Summer 6-2017

Abstract

This paper explores financial tools for investing in natural infrastructure to reduce current and future risks from flooding. The key conclusions are:

1) There is a large and growing pool of funding for natural infrastructure, but the availability is geographically uneven and providing sufficient resources will require significant actions by industry, government, scientists, and communities.

  • There are both public and private sources that can fund natural infrastructure for flood risk reduction. Approaches vary among the U.S., Europe, and international development organizations. For example, funding for natural flood control infrastructure is a byproduct of other purposes in the U.S., but recognized as a specific purpose in Europe and by development organizations.
  • The opportunities for investments in natural infrastructure are shaped by various factors, including local geography, type and extent of ecosystems, knowledge about local flood risks, approaches to funding ecosystem conservation, the capacity of financing systems, and the socioeconomic status of communities.
  • The types and amounts of funding for natural infrastructure can be expected to grow because of innovations such as catastrophe bonds, but current institutional structures are often ill-suited to take advantage of existing and emerging opportunities and are not prepared to meet increasing risk.

2) There is no single appropriate financing mechanism for natural infrastructure. Financing should reflect the distribution of public or private benefits of flood protection through the payment mechanism as determined by specific local conditions.

  • The appropriate funding approach will depend on several factors, including local natural conditions (geography, ecosystems), local governance (including the socioeconomic status of communities), the condition of national financial systems (including the robustness of public or private property insurance markets), and public policies that explicitly support the use of natural infrastructure. We identify the key characteristics of these factors that should influence decisions on appropriate funding mechanisms.

3) he largest opportunities for funding are in the redirection of post-disaster recovery funds to pre-disaster investments in risk reduction.

  • Flood risk reduction should be undertaken before the flood occurs, but we currently spend much more on recovery efforts than on risk reduction. The greatest opportunities to increase resources for risk reduction lie in combining funds for risk reduction with funds for flood recovery. These investments will further reduce damages to lives, properties, and communities over time. •
  • Recent innovations such as catastrophe and resilience bonds offer potential approaches to combining recovery and risk reduction, while green bonds may provide pre-disaster financing under appropriate conditions.

4) The largest barriers for securing adequate resources are: identifying locations where natural infrastructure can play a significant role in flood risk reduction; developing the experience and standards to overcome institutional biases in favor of “proven” gray infrastructure; and developing institutional arrangements capable of matching available funding with the needs of individual situations.

  • To develop new financing, it is critical to develop a body of experience that would expand the existing foundation of natural systems management, risk assessment, and valuation analysis of natural infrastructure, and increase its acceptance and use. The identification of viable projects for nature based risk reduction is critical for expanding pools of available funds. The identification of specific projects- including the location, the ecosystem restoration methods, the expected benefits, and the regulatory feasibility- will often need to be included in the up-front costs of the development of new financing vehicles.
  • Infrastructure banks are an example of institutions that can be structured to match funders with specific needs. These banks can pool the funding needs of different natural infrastructure projects to make them attractive to private capital markets. It will be necessary to create special purpose organizations that can capture the benefits of risk reduction in ways that support market-based finance.

The funding strategy to be used for any specific project will depend primarily on the geographic, economic, and institutional circumstances in each location. But it is possible to create a general framework to catalogue the different approaches to financing, from which locally-determined funding strategies can be formed. This paper proposes such a framework, then outlines and examines the options currently available under the framework, and concludes with an assessment of how funding may expand in the future.

Comments

A report prepared for Lloyds of London by the Center for the Blue Economy, in collaboration with The Nature Conservancy, UC Santa Cruz, and the Wildlife Conservation Society, examines options for financing natural infrastructure (wetlands, mangroves, natural dunes, etc.) that help protect against flooding and storm surge. The results? Investment to conserve natural habitats makes economic sense for investors and insurers. Natural barriers are less expensive than seawalls, the study finds, and with natural infrastructure taken into account, insurers could reduce the amount of claims they pay out and lower premiums. Moreover, there is a large and growing pool of funding available for natural infrastructure investment, with the largest opportunities in redirection of post-disaster recovery funds to pre-disaster risk reduction. With bold action on the part of industry, government, scientists, and communities, natural infrastructure can provide a “win-win-win” for the environment, public safety, and investors. This is the power of the Blue Economy model.

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