The Case for Investing in Climate Resilience

Abhi Ganugapati & Adaptus

Extreme weather events have increased in frequency and severity as a result of climate change. In the past decade, Australia and New Zealand have experienced the impact of significant climate-related disasters highlighting the need for action and investment in climate resilience. The increased risk these events pose has driven the insurance market to rethink the cover offered to businesses, leading to significantly higher premiums or exclusion of coverage for events of this nature. 

In response, asset-intensive organisations are challenged by making timely investments in climate resilience to avoid major impacts, including continuity of service to customers and protection of critical assets. When building resilience to climate-driven risks, the benefits of a solution are assessed by avoiding the fullscale impact of the risk event. Many organisations rely on traditional cost benefit analysis (CBA) analytical methods to evaluate their options. However, a traditional CBA method can undervalue or misrepresent climate resilient investments due to its approach of calculating the benefit, the value of avoided losses or damages. The variability and complexity of these ever-dynamic climate risks creates greater uncertainty in the CBA model and the underlying assumptions. In addition, the fear of over investing and creating a ‘white elephant’, or stranded asset, that ultimately does not deliver value can result in decision-makers seeking more certainty to justify the value of climate resilient investments leading to decision paralysis and inaction.

To address this challenge, we have developed a dynamic decision tool which utilises the framework of a CBA and can integrate emerging methods including scenario analysis and dynamic sensitivity analysis to assess the value of climate resilient investment options. We present a case study assessing climate resilient options to prepare for the impact of a flood event for a major water utility in Australia. To assess the resilient investment options, we compared the cost of each option against the consequences avoided if a flood event of different magnitudes were to occur, including the consequence of inaction. 

The outcomes of the analysis were presented and communicated to decision-makers through an interactive web-based dynamic decision tool, allowing them to understand the comparative performance of options across a range of possible climate scenarios. Each variable can be tested to understand its sensitivity. In addition, a Monte Carlo simulation can indicate the variance and probabilistic outcomes based on the underlying assumptions. Through this analysis decision-makers can understand the value and trade-offs when considering resilient investments to climate change-driven risks, leading to informed decision-making.