How to Value it as Environmental Risks Mount

PAULA-DIPERNA21

By Paula DiPerna

Light, a pastel palette sea, graceful contours of the coast. These pleasures we seek in our dreams, can see in our mind’s eye, and now and then afford when we buy or rent real estate. Hotels call these pleasures “premium” and charge us handsomely for premium room attributes, even though the environment has offered these pleasures to us free of cost. Proximity to the sea and sea views have been advantages for trade, art and culture since the beginning of human settlements—a poetry in the landscape of where we choose to locate ourselves, and conduct commerce. And owners of land near the sea are skillful at translating the free value attached to seafront property by nature into charges they can pass along. After all, who among us checks into a hotel and asks for a room facing a wall?

But, via climate change, we are nastily converting free pleasures into pending threats. Tsunamis from earthquakes are notorious, of course, but earthquakes are for the most part not human-caused. Climate change, on the other hand, derives from human activities and is underway, warming the planet here, cooling it there, but everywhere causing unpredictable and extreme weather patterns.

Wild storm surges are, unfortunately, becoming a new normal, placing new demands on the insurance industry and other financial entities that have to come to terms with how to compensate and cope with ensuing damage costs—current and projected. For what if 1 in 100 year catastrophic weather events start to occur more often? Are those costs bearable financially and operationally, let alone spiritually?

On the operational side, institutions globally have had to put on a new pair of glasses to clearly see new potential risks, and try to take account of them. In the US, perhaps the most dramatic recent example is the new Whitney Museum of Art, the country’s premier museum of American Art, which just moved its collection to a gleaming new building in lower Manhattan, right next to the Hudson River and a few ferry toots from its opening on the Atlantic Ocean. The opening of the new museum was a monumental civic affair, and the new building became a global architectural sensation overnight. From outside, the museum looks like a sleek steel city building that fell asleep and woke up as a ship taking to a narrow strip of water. From nearly every gallery, the Hudson River glistens, reflecting so much sunlight at times that huge scrim curtains need to be hung to cut the glare and avoid possible light damage to the art.

But what about flooding? In 2012, during the infamous Hurricane Sandy, whose storm surge broke all records, lower Manhattan was underwater and blacked out, including where the Whitney now stands. Storm water made the nearby subway tunnels unusable, and rubber dinghies for a time replaced yellow cabs as a way to move around. And, frighteningly, the basement of the new Whitney site, then under construction, was itself flooded with about 15 meters of water.

So, planning had to begin again, and the new Whitney design had to prepare for the worst—not just to save the building of course, but to protect the priceless art inside—the core mission and raison d’être of the museum after all. The result is a fortress against the tempest, with an enormous flood door and heavy mobile walls that are in storage until the day they may be needed, said to be able to be erected quickly. This is as close to sealing up the museum like a submarine as is possible with today’s technology. In fact, the company that helped with the design is Walz and Krenzer, with the tagline, “Watertight closures for the Marine Industry since 1939.”

To fund the museum, US$ 125m in revenue bonds were issued by the Trust for Cultural Resources of the City of New York and recently rated “A” by Fitch’s. Interestingly, the ratings criteria on the financial viability of the museum did not apparently include any plus or minus that would reflect the museum’s storm preparedness, though presumably the extra resiliency planning should make the museum more viable and insurable, and thus more likely to deliver on its revenue projections in that business interruption in the event of a major storm should be lessened.

But no one really knows. The storm system, while state of the art, remains to be tested, although no one would like to see it tested in real life.

Urban resiliency and hardening of coastal locations is a hot topic worldwide today, in view of climate change. Especially so in Asia, where memories of coastal wipe-outs are all too recent and vivid, even more especially in Hong Kong, with its superb miles of river walks, concert halls, hotels and museums along Victoria Harbor. Still, the financial services sector is perhaps playing catch-up to weather facts.

In the meantime, globally, the “1 in 100 initiative” is underway, an effort convened by partners such as the UN Office of Disaster Risk Reduction, Standard and Poor’s, and the Willis Group, a global risk advisor and insurance and reinsurance broker. Currently, the ‘1 in 100 year’ stress test gauges disaster risk and evaluates the “maximum probable financial loss” an entity could expect to face in a hundred years, i.e., a 1% chance that disaster would occur in the next 12 months. A ‘1 in a 100’ event is generally an insolvency risk and indeed a ruined art collection would be the equivalent to insolvency. The ‘1 in a 100’ stress testing framework is used by the insurance industry, and the new initiative aims to integrate similar standards into the financial services sector, and banking and securities regulation. In other words, to fortify financial assets in the same way as physical assets.

Whether parallels exist remains to be seen, but the irony does remain: climate change, human-induced, is so nefarious it is saddling timeless free pleasures, such as proximity to the sea, with costs and risks not conceived even a mere decade ago. BM