We’ve been building for a world that no longer exists

We’ve been building for a world that no longer exists and it will catch up with financial portfolios sooner or later


By Ryan Ness Contributor  Toronto Star

Mon., Sept. 27, 2021

They say a rising tide lifts all boats, but Canadian investors would do well to recognize that most assets don’t respond nearly as well to rising waters. The consequences of a warmer and more volatile climate have yet to be priced into markets, which could leave many Canadians under water, both physically and financially.

Climate impacts are the macroeconomic threat we’re not paying enough attention to. Disruption from climate-change-fuelled events is already hurting productivity, mobility, trade, communications, and food and water security, hurting economic growth and the health and well-being of people across Canada.

But beyond these acute crises, the impacts of living in a country that is warming twice as fast as the rest of the world carries a serious financial risk that threatens Canadian investors. The hard truth is we’ve been building, and investing, for a world that no longer exists, and the new world we need to rapidly start adjusting to is only now coming into view.

A new report from the Canadian Institute for Climate Choices on the costs of climate change for Canada’s infrastructure estimates that within 30 years, the cost of damage from coastal and inland floods to homes and buildings will increase to $4.5 billion to $5.5 billion annually — three to four times today’s rates. As spectacular flooding like we saw in Germany this summer becomes increasingly likely everywhere, the expensive housing stock of Toronto, Ottawa, Calgary, Edmonton, and Vancouver are among the assets most at risk.

However, owners of infrastructure — from homes to roads to electricity grids — have to rely on guesswork to assess the present and future risk of flood, wildfire, and permafrost because publicly available information is dated, inaccessible, or altogether absent.

Banks, pensions, insurers and other institutional investors can use their considerable resources to assess such risks internally or pay others to do so, but without a strong foundation of open-access climate risk information, those assessments still leave gaps in financial analysis. So, not only do homeowners and business owners have less understanding of their climate risk than their lenders and investors, but nobody understands the entire scope of risk.

Without better information, building, buying, and investing in infrastructure that is vulnerable to climate change will continue, further exacerbating financial risk. Increased climate-related damage in vulnerable regions and industries will lead to higher costs of capital and insurance, which could eventually translate into reduced investment, higher levels of credit default, lower asset values, and lower returns.

To encourage investment in green and resilient infrastructure, one of best things governments could do is expand the availability of climate risk data that homeowners, government agencies, and financial services firms need to make financial decisions that align with a climate-smart future.