forbes.com
Market Failure on Climate Resilience: Underinvestment Despite Massive Losses
Global markets undervalue climate resilience, despite climate shocks costing over \$525 billion in emerging markets and \$28 billion annually in EU agriculture, resulting in underinvestment in climate-resilient infrastructure and a misallocation of capital.
- How do outdated economic models and risk assessments contribute to the underinvestment in climate resilience infrastructure?
- This market failure stems from an asymmetry in how risks and returns are evaluated. Current financial systems, using historical averages, fail to properly price climate risks and ignore the returns on resilience investments. This leads to a misallocation of capital, with far more investment in non-resilient infrastructure.
- What systemic changes are needed across the financial value chain to mainstream resilience and incentivize investments in climate adaptation?
- The solution necessitates a paradigm shift from risk management to viewing resilience as a source of growth and stability. Integrating resilience into financial decision-making, including credit ratings and macroeconomic planning, is crucial. This would incentivize investments in climate adaptation and unlock trillions in capital.
- What are the key economic consequences of the global market's failure to account for climate-related physical risks, and how are these risks currently mispriced?
- Global markets are failing to adequately account for climate risks, leading to underinvestment in resilience despite substantial economic losses from climate shocks. Systemiq's report highlights over \$525 billion in losses across emerging markets and \$28 billion annually in EU agriculture due to these shocks.
Cognitive Concepts
Framing Bias
The article strongly frames climate resilience as an investment opportunity and a driver of economic growth. This framing, while valid, might overshadow other important aspects like social equity and environmental justice. The repeated use of terms like 'growth', 'stability', 'competitiveness', and 'returns' emphasizes the economic benefits, potentially downplaying non-economic considerations. The headline itself implicitly frames the issue as a market failure.
Language Bias
The language used is generally neutral, but phrases like "flying blind" and "fundamental misallocation of capital" carry strong connotations. The repeated emphasis on economic terms like 'returns', 'investment', and 'value' subtly pushes a particular perspective. The use of words such as 'dangerous' to describe the consequences of inaction also adds a persuasive tone.
Bias by Omission
The article focuses heavily on the economic and financial aspects of climate resilience, potentially omitting social and ecological perspectives. While it mentions displaced people, the human cost isn't deeply explored. The article also doesn't discuss potential downsides or unintended consequences of resilience investments, such as the potential for 'greenwashing' or displacement due to infrastructure projects.
False Dichotomy
The article presents a somewhat false dichotomy between 'investing in resilience' and 'flying blind on physical climate risk'. While it acknowledges that some risk management is occurring, it frames the choice as primarily between these two options, simplifying the range of possible responses and strategies.
Sustainable Development Goals
The article emphasizes the misallocation of capital towards non-resilient infrastructure, highlighting the urgent need for investments in climate resilience to mitigate climate change impacts. It showcases examples of how resilience investments can lead to economic benefits and improved creditworthiness, advocating for a shift from risk management to a growth strategy focused on resilience. The article directly connects the lack of investment in resilience to increased economic losses due to climate shocks, supporting the importance of climate action for sustainable development.