How to Reduce Climate Costs Using Nature

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Natural areas dramatically reduce property damage from extreme weather. New research shows the financial benefits.

Even if carbon emissions fall dramatically, climate impacts will continue to play out. We face a new reality of extreme weather, with storms and flooding, and we need to find new ways to adapt.

In my research, which recently won the Ivey/ARCS PhD Academy Best Paper Award, I’ve focused on the economic benefit of natural areas. We’ve long known that natural systems are excellent at absorbing weather shocks. For example, wetlands hold stormwater and reduce flooding, while forests reduce the risk of landslides and act as windbreaks.

I’ve measured the economic value of natural areas in United States counties, in terms of weather damage, municipal bond yields, and even population growth and personal income. The results make a strong argument for preserving local natural areas.

4 Types of Economic Benefits from Local Natural Areas

I looked at counties in the United States in terms of whether they preserved their local natural areas or “natural capital,” including parks, wilderness areas, and nature reserves. I looked at 313 cases of natural capital loss. For example, the government has decreased the size of some of protected areas to install power lines or build roads and railways, and has allowed small-economic activity in the parks (farming, artisanal mining, etc.)

Using data from 1976 to 2018,[1] I looked at what happened after an extreme weather event, specifically a heavy rainstorm.[2] I compared counties that had kept their natural areas with those that had recently lost natural area. After a storm, how did each area fare?

Here are the benefits that I found for counties that preserved their local natural areas.

  1. Less extreme weather damage. Counties that preserved their natural areas had $9-23 million less damage from extreme weather. Specifically, I looked at damage to crops and property, often from flooding and winds.
  2. Lower municipal bond costs. Counties use the municipal bond market to fund public projects and infrastructure. For counties that preserved natural capital, the interest rates (i.e. yields) on the municipal bonds were significantly lower. Consequently, their interest expense on a new bond would decrease by as much as $1.1 million, compared to counties with natural capital loss. Why? The interest represents the local risk to investors, and they’re increasingly concerned about climate impacts.
  3. Stable population. Counties with natural capital loss have a 4.5% higher population loss – people moving out of the county. That departure might be because the extreme weather damage makes people seek more secure areas —as, for example, when people left New Orleans after Hurricane Katrina
  4. Higher personal income. Counties with lower natural capital loss have 1.2% higher per capita income than those that lose natural capital. Again, it’s possible that more resilient counties attract both residents and businesses.

The dangers of natural capital loss don’t hit equally. I found that counties where the economy depends on farming experienced the worst impact, with economic damages between 9.6 and 34.6% higher than non-farming counties. That’s because farming is very exposed to the water and winds associated with heavy rain. Without natural areas to buffer those impacts, the crop damage threatens the broader food supply.

Natural capital has value everywhere

I studied the United States, but the same economic benefits of natural areas likely hold globally. Because of this power to absorb the impact of extreme weather, many conservation scientists and economists have proposed “letting nature do its job”: conserving natural areas to reduce the effects of global warming.

How Policymakers and Businesses Can Preserve Natural Capital

Most leaders want to see the benefits I’ve outlined: less weather damage, lower financing costs, stable populations, higher personal income. Preserving natural capital should be a priority.

Yet, often natural capital is neglected. Policy and corporate agendas seem to target emissions reductions, which are important but only part of the picture.

Here are some steps decision-makers can take.

  1. Consider infrastructure projects as they relate to the impact on nature. Projects such as hospitals, highways, schools are obviously important for economic and social welfare. But factor in the financial and non-financial costs of losing nature: loss of habitats and biodiversity and the greater impact of extreme weather events.Specialized NGOs such as the Nature Conservancy, World Wildlife Fund, and Carbon Trust can help assess the overall impact of local projects. Recognizing the impacts may lead to more creative thinking, so that the community can have the desired amenity, but with the minimal impact on natural capital.
  2. Access innovative funds for natural areas preservation. Often it’s challenging to find resources to preserve natural capital. One emerging option is “green” bonds, which fund a variety of environmental initiatives, including natural areas conservation. For example, the state of Massachusetts funded the acquisition of conservation rights of 70 acres of coastal land. These bonds attract new environmentally conscious investors while helping to reduce risk.

In an age of partnerships, as ideas of business sustainability continually expand, there’s likely to be an increased role for businesses in these decisions.

Nature Has Financial and Non-Financial Benefits

The more we protect nature, the easier the path will be towards a cleaner and more resilient future. There’s a role for all: from individuals to governments and large corporations. Recognizing nature’s financial and economic importance provides additional arguments for nature conservation.

My personal goal is to contribute to the fight against global warming by advancing the research in finance and providing policymakers with insights related to the climate emergency.

I grew up in a small town in the south of Italy, surrounded by farm fields and beautiful natural habitats. My childhood experiences shaped my appreciation for nature and its value for humanity. Moreover, I witnessed firsthand the impact of global warming on our small family farm. My deep appreciation for nature and drive to make an impact have driven my passion for this research.

US President Theodore Roosevelt captured the poetry and power of nature in 1910: “There is a delight in the hardy life of the open. There are no words that can tell the hidden spirit of the wilderness that can reveal its mystery, its melancholy and its charm. The nation behaves well if it treats the natural resources as assets which it must turn over to the next generation increased and not impaired in value. Conservation means development as much as it does protection.”

[1] I used data from WWF that tracks changes in natural areas. These changes are known as “protected area downgrade, downsize, and degazettement” (PADDD). See https://www.padddtracker.org/ for more information. I also used the Protected Area Database from the United States Geological Survey, which inventories protected areas.

[2] I use the precipitation data because some of the most frequent and damaging extreme weather events in the past years have been severe storms and tropical cyclones (Smith and Katz, 2013). I chose as extreme weather events months in which a county experienced average precipitation greater than the 95th percentile of the distribution of past precipitation.

About the Research

This post draws on the working paper “Nature as a Defense from Disasters: Natural Capital and Municipal Bond Yields” by Claudio Rizzi. This work won the Best Paper Award at the 2021 Ivey/ARCS Ph.D. Sustainability Academy. Contact the author for additional information.

About the Ivey/ARCS PhD Academy

The PhD Sustainability Academy, co-hosted by the Ivey Business School and Alliance for Research on Corporate Sustainability (ARCS), convenes 15 promising PhD students and senior researchers championing path-breaking research on sustainability across multiple disciplines using diverse theoretical and methodological approaches. Each student receives intensive feedback on their research project. The participants and faculty members represent a range of management disciplines and methodologies. This Academy represents one of the foremost learning and networking events for students researching social and environmental issues.

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Author

  • Claudio Rizzi is a Ph.D. candidate in Finance at the University of Miami Herbert Business School. He holds a MS and a BS in Finance from Florida State University. His research focuses on the interdisciplinary connection between environmental sustainability, climate change, and finance. Specifically, he seeks to understand the role of nature for firms and local economies.

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