The Brief: The double benefits of climate adaptation bonds

Greetings Agents of Impact! Welcome back from our Brief summer break. Hot enough for you? With the heat dome that has been causing record high temperatures extending across a majority of the US this week, and 2024 looking like the all-time hottest year on record around the world, we’re bringing you a full package of stories (and a podcast!) with the same takeaway: the rising risks of climate change also raises the value of investments in climate resilience and adaptation. The 1.5-degree Celsius scenario is no longer hypothetical; it’s already here. – David Bank 

In today’s Brief:

• Bonds to finance climate resilience
• Climate risks to family finances
• Food finance and climate-smart entrepreneurship in Africa
• Climate, insurance and risk management (podcast)

Featured: Climate Finance

Climate adaptation bonds can pay off for investors in reduced risks from extreme weather. In California, voters in November will consider a first-of-its kind $10 billion climate bond to harden the Golden State against floods, droughts, wildfires, extreme heat and other climate hazards. In Colombia, the International Finance Corp. is rolling out a $50 million biodiversity bond to finance climate-smart agriculture and mangrove restoration. The Asian Infrastructure Investment Bank last year issued its first climate adaptation bond. The flurry of issuances targeting climate adaptation signals the emergence of debt instruments to finance the tough, unsexy work of increasing the resilience of communities, businesses, and public infrastructure. Bonds for climate adaptation and resilience “will be an important way for sovereigns and corporates alike to raise capital to respond to climate impacts,” says Sabrina Nagel, who leads climate adaptation and resilience for the UN High-Level Climate Champions.

• Double benefit. Adaptation bonds offer benefits for investors beyond coupon payouts, in the form of reduced risk and improved performance, reports ClimateProof’s Louie Woodall for ImpactAlpha. Last summer, storm Hans swept through Scandinavia, causing widespread flooding and $1 billion in claims for Swedish insurers. Folksam received claims from over 1,500 customers in the immediate aftermath. This year, Folksam invested 2.5 billion Swedish kronor ($230 million) in an adaptation bond floated by the city of Stockholm. Upgrades to the city’s water infrastructure could reduce payouts for future storms, Folksam explained. In Ecuador, asset manager Symbiotics last year arranged a green bond to boost microfinance lender Banco Solidario’s lending to small farmers. Sustainable agriculture, climate-smart farm inputs, restoration and soil erosion alleviation will improve the productivity – and the credit risk profile – of Ecuador’s small farmers, said Symbiotics’ Sebastián Sombra.
  
• Investor demand. Physical damages from climate-related disasters are expected to exact costs of up to $3 trillion a year by mid-century. Climate adaptation funding has long taken a back seat to emissions-reduction and other climate-mitigation approaches. Green, social, and sustainability bonds and other labeled debt instruments have proliferated, but few have specifically dedicated proceeds to the physical impacts of climate change. Bonds are “a proven, demonstrated asset class with high demand from fixed-income investors,” Ujala Qadir of the nonprofit Climate Bonds Initiative tells Woodall. That provides scale to meet the surging demand for adaptation funding. “We don’t need to puzzle over new and innovative instruments,” Qadir says. “We have something to start with that already works.”
  
• Keep reading, “Climate adaptation bonds can pay off for investors – in reduced risks from extreme weather,” by ClimateProof’s Louie Woodall on ImpactAlpha.

Fiduciary Future: The ‘perfect storm’ of climate risks that is sinking your net worth. From the Gulf of Mexico to the East Coast, sea levels are rising at a rate that scientists call “very abnormal and unprecedented.” Galveston, Texas, has seen its coastal water rise eight inches in 14 years; the sea level along the Gulf Coast more broadly is rising at twice the global rate. Faced with mounting losses, insurers are pulling out of those communities – but they’re not retreating from the investments that are causing the damage (see, “Insurance companies are fueling climate risks that threaten their own business”). Without insurance, home buyers cannot secure mortgages; homes become unsellable. The crisis is already crashing the personal finances of American families, especially the millions with the majority of their wealth in the values of their family homes, As You Sow’s Andy Behar explains in his latest Fiduciary Future column on ImpactAlpha. In the US alone, homeowners face $1.2 trillion in potential value destruction, according to the climate risk firm DeltaTerra Capital. “All that on top of catastrophic hurricanes and you have a ‘perfect storm’ wreaking havoc on millions of Americans’ net worth,” writes Behar. More and more of those costs are falling to state and local governments. The convergence could crash the global financial system, Behar warns. 

• Proxy power. It’s not only homes that may be financially and literally underwater. In Port Arthur, Texas, fossil fuel processing facilities have been destroyed by rising seas only to be rebuilt on the same sites. As You Sow has filed multiple shareholder resolutions asking local oil producers not to rebuild in flood zones after facilities have been destroyed, notes Behar. “They continue to ignore this obvious material risk to operations at the expense of shareholders and local communities.”
  
• Keep reading, “The ‘perfect storm’ of climate risks that is sinking your net worth,” by As You Sow’s Andy Behar on ImpactAlpha.

Dealflow: Food Security

Investors commit $11 million to catalyze financing for nutritious food in Africa. Belgian impact investor Incofin partnered in 2020 with the Global Alliance for Improved Nutrition, or GAIN, to design an investment fund to fight malnourishment and food insecurity in Africa. The Nutritious Foods Financing Facility has secured $11 million in catalytic first-loss capital from USAID and the Swiss Agency for Development and Cooperation to invest in small businesses boosting local access to nutritious foods through processing, transport and distribution. The anchor investment will allow the open-ended fund, called N3F, to deploy capital and build a track record while fundraising toward its $30 million target. N3F aims to pair its investment capital with technical assistance funding.
 

• Investing in nutrition. Investment in food and agriculture in Africa “has often neglected healthy dietary needs, focusing instead on crops for export or staple foods,” observes GAIN’s Roberta Bove. “We aim to support entrepreneurs who deliver most of the food to local consumers and make diets healthier.” Incofin seeks to supply “over 514 million additional servings of nutritious food, benefiting more than seven million lower-income people over the next decade.”
  
• Catalytic capital. USAID provided grant funding to develop N3F’s theory of change and impact framework. Without the initial funding from USAID, the Swiss agency wouldn’t have participated, said USAID’s Songbae Lee. “Without SDC, the fund would not have reached its minimum first close target.” Lee credited his colleague Rebecca Egan’s work on the deal.
  
• Share this post. 

Helios inks $200 million for Africa climate fund. London-based Helios Investment Partners is aiming to raise $400 million for its Climate, Energy, Adaptation and Resilience, or CLEAR, fund to invest in African companies supporting climate mitigation and adaptation initiatives. As much as 15% of Africa’s GDP is jeopardized by climate change. CLEAR Fund will invest in mid-sized companies to help them green their businesses and curb carbon emissions, and in entrepreneurs building companies in green mobility, resource and waste management, digital climate finance, and climate-smart agriculture. Helios is halfway to its target with anchor investments from InfraCo Africa and the UK’s Foreign Commonwealth and Development Office. The European Investment Bank, the Emerging Markets Climate Action Fund, and Swiss, Dutch and British development finance institutions also invested.

• Green growth. Capital remains scarce to support the green transition of small and mid-sized companies in emerging markets. British International Investment and Symbiotics’ pair of “green basket bonds” is expanding access to green loan products for small businesses. Gilles Vaes of catalytic infrastructure investor InfraCo called Helios’ first close for CLEAR a “watershed moment” for climate finance for Africa’s growth businesses and infrastructure. “CLEAR will unlock much needed access to finance and exit routes for climate entrepreneurs while giving investors comfort that their investments will generate the growth they expect and support global efforts to address climate change.”
  
• Check it out. 

Dealflow overflow. Investment news crossing our desks:

• Bill Gates’ Breakthrough Energy Ventures raised $839 million for its third climate fund, according to an SEC filing. (GeekWire)
  
• Egypt’s Cartona raised an $8.1 million extension to its Series A financing round to digitalize informal retailers. (ImpactAlpha)
  
• Citibank provided a $22 million loan to Banco Industrial to lend to small and mid-sized businesses in Guatemala. (Citi)

Podcast: Capitol Gains

Climate, insurance and risk management. The 2017-2018 wildfire seasons in California wiped out more than a quarter-century of cumulative underwriting profits for the entire homeowners insurance industry in the state. “That’s just not a profitable business model anymore,” Carolyn Kousky of the Environmental Defense Fund tells hosts Matt Posner of Court Street Group and municipal finance expert James McIntyre on the Capitol Gains podcast, part of the ImpactAlpha Podcast Network. Many insurers have withdrawn from high-risk markets altogether. The way in which modern economies transfer risk through the property insurance model has proven to be unreliable in recent years, Kousky says. “Effective disaster risk management requires coordinated efforts across all levels of government, coupled with innovative insurance models and robust community support systems,” Kousky says on the podcast. “This holistic approach can mitigate the impacts of disasters and help communities recover more swiftly and equitably.”

• Automatic payouts. Parametric insurance provides payouts based on predefined triggers such as wind speeds or rainfall levels, offering immediate financial relief after disasters and filling crucial gaps in the current system (see, “Uptick in climate-smart insurance for vulnerable farmers”). “Parametric policies can offer fast, flexible dollars for immediate recovery efforts, which are crucial for lower-income households that lack liquid savings,” Kousky says. Parametric insurance can also benefit renters, small businesses and local governments by covering non-property losses, such as business interruption or spikes in rental prices.
  
• Fortified homes. State and local governments are pivotal in implementing building codes, planning for land use, and providing financial incentives for homeowners to adopt mitigation measures, Kousky says. She points to Alabama’s fortified homes program, which mandates stronger building codes for new construction in coastal areas and provides grants for fortifying existing homes. “This multifaceted strategy not only enhances resilience but also ensures that communities are better prepared for future disasters.”
  
• Capital and community. Capitol Gains launched last month as the newest addition to the ImpactAlpha Podcast Network (check out the first episode with Utah’s Ben McAdams). The biweekly podcast from Posner and McIntrye engages thinkers and doers at the forefront of US community development and public finance to unpack how decisions are made, policy is enacted, and projects are funded.  
  
• Keep reading and listen in to “Climate, insurance and risk management,” with Matt Posner and James McIntyre on the Capitol Gains podcast, part of the ImpactAlpha podcast network. 

Agents of Impact: Follow the Talent

Tony Berkley, previously with FII Institute, Prudential and Kellogg Foundation, joins Opportunity Finance Network as chief development officer… Mariletzy Venegas, formerly with Boston Consulting Group, joins Social Finance as impact advisory associate… Blue Forest seeks a utility and corporate engagement senior manager or director… Rockefeller Foundation has an opening for an energy transition manager in New York. 

Kellogg Foundation is recruiting a program officer for its Family Economic Security and Expanding Equity initiative… Roots of Impact is looking for an impact-linked finance associate or senior associate… Triodos Bank is on the hunt for a senior relationship investment manager in Brussels.

New York City Economic Development Corp. seeks an operator to develop a $100 million-dollar climate innovation hub at the Brooklyn Army Terminal in Brooklyn. The deadline to apply is Thursday, Sept. 5… Accion Venture Lab will host its Fintech for Inclusion Global Summit in London, Thursday, Sept. 12. ImpactAlpha subscribers get 20% off with the code IMPACTALPHA20OFF.

👉 View (or post) impact investing jobs on ImpactAlpha’s Career Hub.

Thank you for your impact!

–  Aug. 5, 2024