US real estate

Financial markets fueled the Colorado fires

Even by recent standards of destruction wrought by climate change, the December wildfires in Boulder County, Colorado were particularly haunting. Within hours, if not minutes, fires engulfed entire homes, then entire neighborhoods. Families had little time to collect their belongings, if they could go home. The fires caused at least $513 million in damage and destroyed 1,100 buildings. Many households can be underinsured or unable to recoup their losses.

Described as a “urban firestorm” by scientists, the Colorado wildfires were notable not only for their unprecedented ferocity, but also for their location along the wild-urban interface (WUI) where cities like Boulder are located. This vulnerable WUI has been in the making for decades, as developers, policymakers, and other leaders in the greater Denver area have demanded and invested in sprawling growth. Like just an examplein neighboring Jefferson County, every 1,000 new residents has resulted in the loss of 470 acres of natural land in recent years.

The location and design of our built environment – often single family homes, strip malls and other low density development stretching along the urban fringe – set the stage for all this destruction to take place. America can only adapt to climate realities if we start to reconsider where we invest and what we build. And we can’t transform where and what we build unless we rethink how private capital markets and public investment work together.

Urban climate vulnerabilities are not limited to Colorado or wildfires. Queens, NY basement residents lost their lives in Hurricane Ida due to the lack of safe and affordable housing in the city. Thousands of homes were destroyed in Houston during Hurricane Harvey because insurance markets and government planning allowed construction in the floodplains. Even daily temperature fluctuations are hurting thousands of Americans in cities that give off heat due to the lack of urban green spaces.

These climate tragedies are the direct result of how we plan and build communities. Federal, state, and local governments continue to expand freeways, extend water lines, and build new infrastructure to meet the near-term demands of suburban growth. These infrastructure expansions tend to rely on traditional designs and technologies that cover land, deplete natural resources and release more pollution. Public funding at all levels continues to subsidize and encourage this activitywhile land use plans, capital budgets and other policies struggle to integrate and respond to ever-changing climate needs.

Meanwhile, property developers, lenders, investors and insurers continue to support risky growth in areas susceptible to climate hazards. Developers and home builders have little incentive to take climate risks into account in new projects. Landlords, including homeowners and institutional landlords, lack information about location-specific real estate risks. Since most real estate is purchased with a combination of debt and equity, no single entity bears the entire financial exposure to climate risk. Banks, financial intermediaries and federal regulators do not transparently measure, assess or integrate climate risks into underwriting decisions. Insurers may have property-specific weather risk data, but don’t share the information publicly or scramble to track damage developments in real time.

Together, public and private leaders often fail to recognize—and price— climate risks in our transportation, water and real estate assets, while failing to protect communities from harm.

Imagine if we better assessed these climate risks. Measure and adapt to a more extreme climate more accurate regional data, forward-looking investment plansand new green infrastructure designs such as vegetated buffers and green roofs – not only have the potential to reduce future costs, but can also lead to environmental and economic benefits, including increased resource efficiency, increased property values ​​and additional workforce and business development opportunities.

For example, in 2017, the Massachusetts Bay Transportation Authority (MBTA) issued $370 million in sustainability bonds to fund a variety of station upgrades, flood protection, and other improvements to Boston’s transit system. Even better, investors loved the perks and gave MBTA better terms on its debt.

Rather than investing in the same vulnerable and sprawling projects, we need new approaches that spawn more examples like the MBTA experience. We need financial markets to help build urban resilience, or the ability of the built environment to be more flexible and responsive to climate impacts. More funding for climate improvements overall would help, but public and private leaders nationwide need to rethink How? ‘Or’ What we invest, not just How many invest.

Capital markets are the best way for America to achieve the scale of investment the country needs. But these markets need incentives to offer greater resilience. New Brookings Research highlights how such an approach could work through a new climate finance framework – a set of policies and programs that direct more public and private capital towards resilient infrastructure improvements. We know that private dollars will always drive profit, so these rules should push the market to invest in safe places using sustainable designs.

This means that the insurance industry should provide landlords and the private sector with more realistic scenarios before choosing where to invest in real estate. The credit ratings of water utilities and other local governments should be downgraded if they invest in places prone to drought-like conditions.

This should be expensive to build the wrong way. Too often, however, it is the opposite.

The consequences of our current flawed approach are all displaced Coloradoans now looking for new places to live and taking out insurance policies that will not cover all of their losses. They won’t be the last Americans to face this kind of preventable tragedy. It’s time to revamp our financial markets for the climate emergency and make resilient places profitable for people and the planet.