How do we incentivise more investment in green infrastructure to reduce flood risk?
By Steve Wilkinson, JNCC
Accelerating green finance needs clear focus on who the investors are and the drivers for that investment. In today’s blog we discuss how addressing flood risk should be a key area but it’s not clear who should pay or how to catalyse the opportunity.
Increased frequency and severity of flood events is an impact of climatic change across the UK. Typically, the primary means of managing floods is through hard flood defences, maintained by various parts of government. However, the way whole landscapes are configured and managed can significantly impact their ability to buffer the flow of water downstream. Habitats such as bogs, wetlands and some woods are particularly strong buffers. Improved agricultural soil management, through more regenerative farming methods, can also reduce compaction and increase permeability. Over wide areas these can all add up to a significant impact on managing downstream flows. This is the second in a series of blogs looking at using risk management as a means of driving more investment in natural capital and considers the challenges of enabling the investment in flood management.
Restored Peatlands © Steve Wilkinson
The landscape interventions required to support flood management generally also provide other benefits, particularly carbon sequestration and storage: floodplains and wetlands play a disproportionately important role in this. In contrast to built defences, nature excels at providing multiple benefits and managing multiple risks. To reflect this, ‘green’ investments ought to be spread across a broader set of benefits (referred to as “stacking” or “bundling” in investment circles) to accelerate the uptake and help to get the interventions in the best places to reduce societal and economic costs. The challenge is how to draw in this additional investment and who should pay?
Government
Government, and hence taxpayers, usually underwrite the investment needed in land use change, and all UK governments do have significant investment in the agricultural sector. But, as raised in the previous blog, is this sustainable at the scale we need to move now, and is the distribution of costs and benefits fair?
Property owners and other private interests
Is it those with most to gain directly that we should look to for this additional investment in natural flood management? In this case it would be the homeowners and businesses that are most at risk of flooding. The mechanism most of these actors use is insurance policies to offset that risk; co-ordinating and collating investment across them to enable the scale of land use change required could be challenging. Given the accumulation of factors across catchments that contribute to flooding, the diffuse aspects of risk ownership is one of the key challenges for the future.
Insurance companies
Insurance companies are seeing the increasing risk, and this is leading to more expensive policies. There are already instances where renewing insurance can be difficult if not impossible. This has led to novel agreement between the UK Government and the Association of British Insurers (ABI) which established “Flood Re”; an industry led reinsurance mechanism to ensure that all eligible properties can obtain insurance. The mechanism maintains a pool of money to underwrite the risk, a combination of an annual levy on UK home insurers and an additional charge for each policy which is passed into Flood Re. Importantly the scheme is only open to domestic properties, not businesses, and excludes properties that have been recently built on flood plains. Overall though the insurance sector has no obligation to attempt to reduce the risk through investing in land use change; their business model is to establish a mechanism to pass the cost of the risk onto customers.
Landowners
It could be argued that increased downstream flood risk is one of the unaccounted-for costs of agricultural production. Presently there is no obligation on the landowners and managers to account for that risk. So, if a landowner removes hedges and trees and implements more intensive management compacting the soil, they will probably increase production, but there is a downstream cost with increased in flood risk which the landowner does not need to consider. Indeed, holding more water in the landscape may create its own set of problems in terms of agricultural production where the land may be too wet to work or for the crops to grow. This signals a wider need to review land use and management as we move from a largely predictable and stable climate into a more chaotic, wetter, and warmer one.
Summary and options
Intuitively there is a business case for investing in adjusting land use and management to help mitigate downstream flooding, the main beneficiaries, the property owners, are too dispersed to act, while the insurance companies and landowners have no real driver to act. This means that the risk defaults back to governments to invest in land use change.
There are some potential ways which governments could use to drive alternatives, including:
- Catalyse more local action to explore pooling money from property owners and businesses to invest in upstream infrastructure to reduce the flood risk. Given businesses do not have access to Flood Re compensation maybe this is the key area to explore. There are emerging examples of this such as the Landscape Enterprise Networks.
- Put more obligation on insurance companies to invest longer term in risk reduction potentially through additional insurance levies
- Ensure that supermarkets and other powerful agents in food and timber supply systems are more directly exposed to the risks arising from their buying power potentially through increased regulation
- Potentially tax or regulate the larger landowners on any flood risk they are creating downstream
Whatever options are preferred will require a clear signal from government to provide the direction.
The flooding example highlights the challenges of drawing additional, non-government, investment into enhancing ecosystem services to embed economies in nature. Rather than hold the risk and cost itself, government has an opportunity to begin to catalyse investment from others, but this requires clear direction and expectation to other actors involved.
The assumption of a relatively stable and predictable climate is now known to be wrong as it shifts to a warmer and more chaotic one. This cries out for all land use choices to be re-examined.