How Can Cities Adapt to Climate Change?
this is exchanges. Goldman Sachs where we discussed developments currently shaping markets industries in the global economy. I'm Jake siewert global head of corporate communications here at the firm today. We're talking about this question. How considers considers become resilient to climate change. We're joined in the studio by man to him and Sandra Lawson authors of a new report from Goldman Sachs Global Markets Institute titled Old Taking the heat making cities resilient to climate change. Amanda and Sandra Welcome back to the program Sandra. Let's start with what gave rise to this this report you focused on the need to adapt to the effects of climate change and become more resilient. Why did you choose that angle rather than say lowering carbon emissions. We did a lot of research on the topic of climate change and we were really stuck by how much attention goes to reducing carbon emissions and how little attention goes to this question of station while reducing carbon is incredibly credibly important and those efforts need continue and they actually need to accelerate. It doesn't seem like they'll be enough for the world to withstand what's coming because the scientists and to say that the world has already warned by about one degree Celsius over the past century and a bit and the world is going to continue to warm and that's a couple of reasons one miss that there's just so much carbon already cumulated in the air in the oceans and that's GonNa continue this warming process that can't be turned off quickly and secondly because despite some progress on reducing emissions the trajectory is not where it needs to be so the world is going to continue to warm and that means that the world is going to need to adapt apt the changes that are coming heat storms flooding all of these are likely to occur more frequently in the next few years right and then you get into the question of how you allocate resources to because resources are not infinite Amanda. Why did you hone in on cities in particular and not more rural or suburban communities. It's a good question we struggled with a little bit because we know that climate change and the need to adapt to climate change is not a local problem. It's a global problem but part the reason why we really tried to concentrate on cities was twofold. One of them is that cities today are already home to more than half of the global population and that's a shared. It's only expected to grow over time and the other reason is that cities produced roughly eighty percent of global. GDP and so the combination in of population density and economic activity makes it likely when you think about this from an investment perspective that cities would be on the front lines of beginning to to experiment and go down the path of really truly adapting to climate change notice Andrew's point. I think cities are already doing really interesting things. As it relates to reducing greenhouse gas emissions we see more bike lanes more parks or alternative sources of energy being used but cities are much less far along in thinking about how to adapt and again there are a lot of people who live in cities and there's a lot of economic activity concentrated there and so again again. Adaptation is likely to occur outside of cities as well but it's a reasonable starting points to think about cities. There's also this question of global versus local so climate change is certainly only a global problem but when you're asking people to solve a global problem sometimes the results are not obvious to them and it's hard to motivate them. If you say your city is at risk of flooding and you need to pay taxes to protect your city your home your business from flooding. That's easier to motivate people politically yeah certainly spent a lot of time in the wake of Sandy thinking that here in downtown one of the things you talk about in the report this issue of fairness and that as my mother used to say life is not always fair wine want to what do you mean by that in this context when you think about cities not all said he's have the same benefits or advantages and some cities are more economically prosperous and have large dense populations and may also have a prior track record of raising financing to undergo infrastructure for structure projects of the sort that we discussed in this paper and those cities are likely to have a natural advantage and continuing down the path of thinking through becoming more resilient into climate change. There are other cities that may have less dense populations or less robust economic activity or may be geographical geographic locations that are simply not beneficial to them and that make technically adapting more difficult or unfeasible and that may simply lack the resources to you make adaptation work for them so there are going to be questions of fairness across cities not every city is going to have the same resources in the same benefits now even and within cities even the most prosperous ones because to the exact point jake you raised at the outset financial resources are not unlimited those cities these are still going to have to make choices about where to allocate funds and what makes the most sense and again that may also raised questions of fairness even within cities that are relatively prosperous as he said at the beginning Sandra that there's near universal scientific consensus around that human behaviors contributing mm to climate change. What are the consequences that scientists are pointing to or focused on well as a preface. We're not scientists. Have we are not trying to make scientific argument. We know that there's a lot of still uncertainty about the magnitude the timing scope but we're looking at the consensus which is in fact that the earth his warming and is likely to continue to warm and so the consensus is also that there's a pretty wide range of negative outcomes that come from this so these include hotter temperatures. There's more heat waves longer. Heatwaves hotter heat waves rising sea levels that are going to flood coastal cities. You know it's worth noting that about forty percent of the world's the population lives within one hundred kilometers sixty miles of the coast and obviously you have huge cities producing a tremendous amount of economic activity on the coast of New York obviously Veasley Tokyo Mumbai. Those are all at risk from flooding. We are probably also gonNA be more destructive weather events. No one needs to be reminded of those are already underway okay so storms wind flooding fire wild brooms think of the West Coast and also storms and places where people don't expect them which we also seen and then it addition to that you're likely to see threats to human health because they may be diseases moving out of places where they are now into places where people don't have immunity a and a lot of pressure on food and livestock and drinking water which is already a problem in large parts of the world especially drinking water so there a lot of others but I think that's enough. That's enough out when you think about the ocean acidifying and warming their affects to ecosystems and we don't even know what all of the knock on consequences of that will be but again the general scientific consensus would point to things like coral briefs potentially being extinct within this century because their fix they can't relocate to cooler waters or less acidic waters for those of you who would like to you see a coral reef in your lifetime. You May WanNa do that now for people who want to move away from eating meat towards fish. That's at risk as well. Let's talk a little bit about infrastructure. What are the implications for cities as they think about renewing their infrastructure base or adding new infrastructure. It's a really broad question that we tackle in the paper and we'll take you through some of the high level ideas but when you think about infrastructure more broadly there obviously cities that are developed today. Hey that are looking at infrastructure replacement cycles and there are cities that are rapidly urbanizing that are building infrastructure for the first time some of the rapidly urbanizing using cities may actually find themselves better or worse place depending on their economic strength to think about climate change in resilience to climate change as they build new infrastructure some of the cities that are already developed. You're looking at bridges roads rail infrastructure that is quite old. Many many of those structures will need to be upgraded. It can't be upgraded necessarily with reference to historical stresses because the issue going forward is we don't know I know how big the tail risk events associated with climate change could be when I think about a city I think about all the things that you do on a daily basis that affect your life whether it's the building that you live in and the building codes associated with that whereas the electron equipment housed will should it be in the basement if you're in a flood zone or you're are at risk of storm surges probably not dear windows literally need to be stronger to withstand higher winds probably and those codes will need to adapt adapt adjust over time you think about coastal locations and again. Sandra mentioned how many cities are near coastlines and how many people live near coastlines. There's much that could be done to protect coastlines with seawalls and levees and other elements like that and Jake you referenced Sandy New York. That's something that's very real but then think about boat transportation systems our roads in the right places in terms of where weather may actually affect them or flood them are rail systems in the right locations nations to withstand changes weather patterns over time and even the Inter connection points for transportation strong enough so that if he it becomes extreme or cold becomes extreme depending on the location people are able to withstand transfer points in between locations and then think about things things like the power grid the US power grid is over a hundred years old and if you look at some distance from the Department of Energy they'll tell you that the vast majority of power outages in the US are due to extreme weather events that great in of itself needs to be hard and it sounds like a simple thing to just say will power lines actually need to go below ground but that's a massive infrastructure build out so when we talk about how it is that cities need to become more resilient overtime. There's an incredibly broad swath of things that actually need to occur for that to unfold at one more which is this question of soft infrastructure that requires. There's a lot of urban planning in addition to all of the hard infrastructure that Amanda talked about you need other things like better health systems and probably more public health programs programs and you need better education and you need cooling centers to be opened up during these longer hotter heat waves. You need places where people can go and they. I know they can take refuge from storms or hurricanes. It's less capital intensive than the infrastructure but all of it is really important and it requires a lot of coordination within a city among all the different departments and a lot of leadership to getting back to capital intensive all the things that Amanda outlined cost a lot of money as well how you thinking about infrastructure investment and financing challenge that all of this entails we're thinking about it as an all of the above approach even the most prosperous cities are not going to be able to fund the stuff alone. They have their local tax. Revenues in cities that are developing quickly may be able to benefit from taxes on land development element. Some cities will turn municipal bonds with those aren't available in most of the world but even where they are. That's not going to be enough so cities are going to have to look to their national governments commits funding and then they're going to have to reach out to the private sector and think about public private partnerships for these huge infrastructure projects like bridges and roads and and potentially power systems. There's a role for institutional investors particularly ones with a long-term outlook like sovereign wealth funds or pension funds that are willing to make these very long term commitments in investing in developing countries you also have international institutions like the World Bank and the regional development banks and they're already playing a really important role and that will continue insurance matters to in lots of ways but mostly there needs to be a mechanism for pricing risk like flood risk and fire risk more realistically weekly so that people don't build and keep rebuilding again and again in flood-prone or fire prone areas Amanda when should cities start to adapt. I mean New York did a lot of work. In the wake of Sandy. You know that was a shock to the system and forced the city to think about its own resilience and what type of cities need to move the quickest. If you think about the question from a traditional investment perspective the answer is usually pretty straightforward. You have a pool of capital you invest it you think about what their returns are on that that capital over time and you decide to invest today or later depending on which is. GonNa earn you a higher return. This is far more complicated because what you're talking about as as the climate changes are extreme tail events and the risk of those events and what's so uncertain about the change in climate is what events will occur win. What path will they take what other knock on consequences could occur so you hear people talking about melting a glacier ice caps and things like that when irreversible bulla vents begin to unfold the entire chain of risk changes. Our perspective is doesn't actually benefit you to wait to learn more information formation the way it would a normal risk reward situation where you're thinking about investment because these terrorist events that aren't going to become more predictable the closer after you get to them in fact waiting me make it so that it's too late and you already lost your ability to get ahead of. Some of the challenges still makes this a difficult difficult question to answer for investors so our general recommendation is start now starting out particularly if you have areas of exposure that you're aware of of and where you can begin to think about investing and try to do it in ways that enable you overtime to adopt those investments as things change and so that you can benefit from input costs and economies of scale that come from new technologies that emerge that make some of these problems problems easier to adapt to and to address in more economically feasible ways over time. You spend a lot of time on this. What surprised you most when you dug get into these issues. What were the most surprising findings in the report. I would say for both of us and actually for the whole team that worked on the report. It was how little attention goes this this question of adaptation despite all the focus on climate change. That's the point where we started the resources the attention the money are going to reducing carbon and of course that's critical but we were really surprised by how few people are focusing on adaptation in and action oriented way. Amanda anything that stood out for you that was one hundred percent my takeaways well which is just how little capital is actually going towards this question. The one caveat I would say is even as we we're conducting the research and thinking through these particular questions we started to see people begin to talk about these issues a little bit more than they had in the past so it feels a little bit like maybe that is on the precipice of changing but only time will tell for us. I think really the lack of focus on resilience was the most interesting interesting takeaway so given that and given that you've dug in a little bit. What do you want to find out next. What's on the docket for your next report so we're going to let her client demand lead us says we always do but there are so many interesting things going on in the broader climate sphere and in the ES Jeez fear as well and our our clients are starting to look at more innovative ways of reasoning financing of looking at climate bonds and all other sort of interesting projects and so for us. We WanNa see this continue to take off and be a topic of focus but we're likely to explore others and we may continue to talk about adaptation. We may do it relative to food for example agriculture but if the client demand changes will explore other areas as well well. Thank you very much for joining US Amanda and Sandra. Thanks Nick that concludes this episode of Exchanges Goldman Sachs thanks for listening and if you enjoyed the show we hope you subscribe apple podcast and leave a rating or a comment for more from Goldman Sachs experts was influential policymakers academics and investors on market moving topics be sure to check out our new podcast top of mind at Goldman Sachs hosted by Alison Nathan a senior strategist in the firm's research division This podcast was recorded on September twentieth. Two thousand nineteen all price references and market forecasts correspond onto the date of this recording. 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