We Can Afford Sustainable Infrastructure — Ventures With High Dividends

Ever get an estimate on what it will cost to renovate your kitchen and bathrooms — after realizing your house needs a new roof and cooling units? Well, that’s the same feeling we get when deliberating the cost of cures for climate change.

To this end, the chief economist for Swiss Re and I discussed the most efficient and cost-effective ways to achieve net zero by 2050. It’s a challenge. However, it is possible through enhancing building codes, increasing flood protection, and discouraging development in risky places. Moreover, sustainable infrastructure yields $3 to $10 in benefits for every dollar invested.

What about the cost of “adaptation” or the price to build sustainable infrastructure? Swiss Re estimates we need $270 trillion by 2050 or $9.4 trillion annually — enough to make our heads spin. But it says federal treasuries, pension funds, and mutual funds hold that money. Fiduciaries need incentives and direction to reallocate those funds toward green ventures.

“We can say that if you build defensive mechanisms to protect housing and infrastructure against flooding, you can capture these benefits,” says Jérôme Jean Haegeli, Swiss Re’s Group chief economist, in a virtual chat. “These investments pay economic dividends. Societies bear the cost of climate change and natural catastrophes. We don’t have a Planet B.”

Swiss Re provides insurance for insurance companies. The ‘reinsurer’ examined 36 countries to determine where their economic exposure lies from climate events. Four weather perils – floods, tropical cyclones, winter storms in Europe, and severe thunderstorms – cause estimated global economic losses of $200 billion every year.

Overall, Asia is the most exposed, meaning its insurance coverage isn’t enough to replace its infrastructure. That includes China, Thailand, Taiwan, India, and Japan. Meanwhile, the United States suffered $60 billion in economic losses in 2023 — an amount that will keep rising.

Swiss Re says we endured $269 billion in economic losses worldwide in 2023. About 40% of that was insured. The richer countries are more likely to have greater insurance levels; thus, they can better bounce back from catastrophic events. That is not so for the developing world.

“Lower income economies rely on the public to buy insurance,” says Haegeli. “But those entities have higher debt levels and fiscal restraints, and thus, they have greater uninsured losses. It affects economic growth and recovery times.”

How To Protect Against Climate Change?

The United States can construct modern buildings that can withstand hurricanes or seawalls to protect against rising tides and floods. Still, Swiss Re says that only 31% of U.S. communities have updated building codes.

U.S.-related losses rise about 5% to 7% annually, says Haegeli — a function of wealth, where people build, and climate change. Indeed, warmer temperatures mean more atmospheric moisture which leads to more rainfall. It also causes warmer oceans, giving fuel to hurricanes. More powerful storms do more significant damage. But advanced economies insure against such risks.

Emerging countries are not so lucky. They lack access to carbon financing to insulate themselves from financial calamity. Consider Africa, which contributes about 3% of global greenhouse gas emissions. That’s compared to the 20 most affluent nations, which comprise 80%. Cyclones hit Mozambique, Malawi, and Zimbabwe, while floods swallow Nigeria. And the horn of Africa suffers from an enduring drought.

How do we get the Global South the resources to protect itself? Or, more broadly, how do we raise $9.4 trillion annually to pay for mitigation and adaptation between now and 2050? Swiss Re maintains that the financial markets have a deep reservoir of capital — monies that can fund sustainable infrastructure. However, institutional investors need guidance to understand national laws and green investments.

“Sustainable debt is not well defined,” says Haegeli. “We have more than 100 shades of green. We have highways that are fast and developed. But we don’t have the traffic lights and the understanding of what is green and what is not. The money is there, but it is a matter of reallocating it.

“We need to understand what green investments are so that industry and markets can better finance the net-zero transition and channel their funds for investments like sustainable infrastructure,” he adds. “Sustainable infrastructure is not only ‘green’ but also has better economic returns, as the data shows. So it is good for the climate and the economy alike.”

The UN Environment Program says greenhouse gases will climb 3% by 2030. But we must cut that number by at least 28% to achieve the goals of the Paris Agreement. Suppose that doesn’t change. Swiss Re says gross domestic product worldwide could contract between 7% and 10% by mid-century.

The ultimate answer is to decarbonize the global economy — to move from a reliance on fossil fuels to a greater dependence on renewable energy. It’s also about saving the rainforests or the natural CO2 vacuums. The challenge is ensuring a smooth transition and paying for it.

Undoubtedly, the cost is high. But the cost of inaction is even heavier. Luckily, sustainable investments have a payback — financially and environmentally.