Modulo 3: ESG and Climate Change

Aula 1

I would like you by the end of this module to understand the concept of climate resilience as a goal in
addition to climate mitigation. First, I'm going to provide you with some context. I'm going to talk
about the concept of ecosystem services also known as natural capital, and we're going to talk about
the vicious cycle that climate change plays with respect to ecosystem services. Second, I'm going to
explain how public law addresses ecosystem services and to identify some gaps in public law legal
rules. Third, I'm going to offer a basic primer on insurance as a novel form of private environmental
governance that has a significant role to play in protecting ecosystem services in the face of threats
from climate change. Finally, we're going to do a deep dive into a case study, the concept being that
rather than providing an insurance policy for a property like a home or a business instead insurance
can cover an ecosystem itself. That's my plan for this module, let's get started. In this module when we
talk about insurance, I want to give you an overarching sense of what some of the key questions are.
The first question is whether and how property insurance can be designed to provide incentives for
investment in nature-based solutions and ecosystem services to address risks from climate change?
Today I'm going to focus in particular on the topic of coastal risk. Second, I'm planning to address the
question of when nature-based insurance might be preferable to insuring homes or businesses. Third,
why insurance? What is it that we gain by using insurance in this context as compared to some other
tool of either public or private environmental governance? Finally, the module will conclude by
asking the question of how generalizable is the concept of ensuring nature. I'm going to focus as I
mentioned on coastal resilience, but there are other contexts in which this approach may be
applicable. What is climate resilience? What are ecosystem services and why should we care about
them? In Module 1 I gave an explanation of the transition to a net-zero economy by 2050. Largely that
presentation focused on the idea of mitigation, reducing or avoiding greenhouse gas emissions so that
we can get to a situation in which there is balance in the atmosphere by 2050 and we have not
exceeded our carbon budget. Resilience is defined as the ability of a social ecological or socio
ecological system and its components to anticipate, reduce, accommodate, or recover from the effects
of a hazardous event or trend in a timely and efficient manner. What does that mean in the climate
context? What is climate resilience? Climate resilience refers to the capacity of organizations,
individuals, and societies to live with, adapt to, and become better equipped to handle those climate
risks that are already upon us. If today's focus is all about ecosystems, first, I want to be sure you
understand what an ecosystem is. An ecosystem is essentially a dynamic complex of plant, animal,
and microorganism communities, and the non-living environment that acts as a functional unit. That's
the definition that comes from the United Nations Millennium Ecosystem Assessment, but what are
some examples of ecosystems? These should all be familiar to you. They include natural resources
like pollinating insects, the bees you can see in the image in front of you. They include
spatially-delineated areas of nature like forests, wetlands, coral reefs, coastal mangroves, and the
global atmosphere, each of which provides services for the benefit of human life. If we know what
ecosystems are, what are ecosystem services? Ecosystem services refers to a somewhat
anthropocentric notion of ecosystems as providing certain different kinds of benefit for human life.
Another way of referring to ecosystem services is natural capital. There are four different types of
ecosystem services according to the United Nations Millennium Ecosystem Assessment. They can be
divided into provisioning services, regulatory services, cultural services, and supporting services.
Provisioning services are in a way the most straightforward. This is the way in which an ecosystem
can provide goods for human consumption. One example would be the way in which a forest provides
timber which can be used to construct homes, or build a fire, or otherwise participate in various
construction projects, or the way in which a river, lake, or the ocean can provide fish for human
consumption. The second category of ecosystem services is known as regulatory services. These are
ecosystem services in which the ecosystem regulates the environment for human benefit. For
example, the atmosphere generates oxygen so that we all can breath. The soils provide nitrogen which
is necessary to grow food that we consume. The third category of ecosystem services is perhaps more
aesthetic in nature. It's the notion of cultural services. People enjoy camping in the woods, hiking in
the forests, swimming in lakes and river. Cultural services refers to the way in which ecosystems
provide recreational and aesthetic enjoyment for human benefit. The fourth category is supporting
services. This is a form of ecosystem services that provides an indirect benefit for humans.
Ecosystems can regulate the land for the benefit of non-human actors like bees or birds who then
indirectly support human life. An example of a supporting service might be a habitat that supports
birds or bees who then pollinate crops for the benefit of human consumption. One significant
challenge about ecosystem services is that they are what economists would call public goods. Public
goods can be identified by two key characteristics. The first is that they are non-rivalrous. The second
is that they're non-excludable. What do I mean by each of these terms? Non-rivalrous refers to the
idea that my use of something does not preclude your use of it as well. I breath air into the ecosystem
of the atmosphere and so do you. That's different from say, driving my car which preclude you from
simultaneously driving my car. Non-excludable refers to the idea that no one can be excluded from the
benefits of the ecosystem. What is the effect of these two characteristics? There tends to be what
economists have found under investment in public goods. If I invest in the protection of a public good
everyone else around me can free ride on my efforts and I do not exclusively reap the benefits. If I
have a car and I take excellent care of my car and I bring it to the mechanic regularly, I benefit from
the maintenance that I'm putting into my car. But if we're thinking about an ecosystem like the
atmosphere; if I take care to make sure that my greenhouse gas emissions are low, then everyone else
who breaths air benefits from my behavior and can free ride on my behavior. Now of course one
individual behaving well with respect to the atmosphere may not sound like a very important way of
guarding that ecosystem, but you can imagine how that works scaling up if we're talking not about
individuals but about nations. Some other examples of public goods other than the global atmosphere
include things like national defense or lighthouses. These are examples of goods in which the
government invests heavily because everyone benefits from strong national defense. Anyone who's in
the ocean or on a river with rocky shoals benefits from a lighthouse even if they don't necessarily
contribute to its upkeep. Another key challenge for ecosystem services is that they are extremely hard
to value. The one exception to this is the idea of provisioning services like fish and timber. Those can
be bought and sold in markets, and therefore they're extremely easy to value. But if we're talking
about the benefit that I derive from taking a hike in the wilderness or the benefit that the United States
of America derives from the coral reefs acting as natural seawalls along its coast, those are much more
difficult to value. These services are not traded in markets, and as a result this raises questions about
how much to invest in their protection and restoration if they're harmed as well as what is the
appropriate level of regulation to protect them. Despite the difficulties and challenges of valuing
ecosystem services that are not things like fish and timber that are traded in markets, economists have
actually come up with certain valuation methodologies. These include things like replacement cost. If
a wetland provides certain ecosystem services such as the purification of water how much would it
cost instead to build a water filtration plant? That might be one way to determine the value of the
wetland. Another way to value ecosystem services is based on something like willingness to pay. You
could do a consumer survey to ask how much people would be willing to pay to have the benefit of a
particular habitat. Again, the challenge with that method is that your average person on the street
taking that survey doesn't necessarily know all the benefits that they derive from that ecosystem. A
final way that economists have used to value these intangible ecosystem services is known as revealed
preferences. If there's an aesthetic benefit that humans receive from living near natural resources like
the woods, an economist could compare home prices for homes that are close to this ecosystem with
home prices that are further away and attempt to determine how much more consumers are willing to
pay to be near an ecosystem. Each of these different methods is an effort to value these services
indirectly. Why do we need to value these services? Again, the question of how much value they
provide raises important questions for how much protection these services may warrant in the
regulatory space and what forms of public law or private governance would be appropriate to protect
them. I'd like to give one final preview since I'm going to be focusing on insurance going forward, is
that insurance doesn't necessarily face the same problems as public law regulations because insurance
can rely on estimates that are much easier to obtain such as for example the cost of restoring a
damaged ecosystem rather than the sum total of all of its benefits to humankind.
Aula 2

So what I've just described to you are some of the general challenges that ecosystem services face.
But what I'd like to do now is bring this into the particular context of climate change. Research shows
that we are as a result of climate change facing many more severe weather events and disasters. These
include coastal storm surges, long term challenges like sea level rise, short term events like severe
precipitation and hurricanes and cyclones. These severe weather events and disasters are leading to an
increase in both insured losses and uninsured losses for homeowners and business firms. So this data,
which is provided by Global Reinsurer Munich Re, is a chart showing the number of loss events in the
United States between 1980 and 2018 broken down by the type of event. It's very clear from this chart
that the number overall of events has been increasing since 1980. And you can see from the chart that
climatological events which are represented by orange bars, including extreme temperatures, droughts
and forest fires. As well as hydrological events, floods and mass movement, as well as meteorological
events, tropical storm, other types of storms have all been increasing dramatically. Coastal flood risk
is a very significant area of risk. This map shows New York City's wetlands that are historic in nature.
This chart shows you coastal flood risk zones, the yellow marks the 100 year flood zone. And the
orange, the 500 year flood zone. The red shows where Superstorm Sandy in 2012 flooded areas of
New York. If I go back here, you'll be able to see how there's a significant overlap between the area
that flooded and the historical wetlands. The flooding that occurred as a result of Superstorm Sandy in
2012 was extremely significant. Areas stretching from Manhattan to Brooklyn to Staten Island and
elsewhere all received significant inflows of water. The subways were flooded, and this was not
limited to a Single major event in 2012. I'm a resident of the city of Philadelphia, and just weeks ago,
the remnants of Hurricane Ida blew through the city, leading to massive flooding on a major highway
that runs through the city as well as significant damage to many homes. So this is a really significant
problem for business firms and for homeowners and it can cost billions of dollars to repair the
damage. This is a result in part of what happens when wetlands are developed and can no longer
perform their essential function as a sponge to absorb storm surge. Now not all areas within the
United States suffer these intense storms. The major damage of both tropical storms and hurricanes in
the United States has historically been along the southeastern coast of the United States. The Gulf of
Mexico and the lower portion of the United States along the Atlantic coast, with Texas, Louisiana and
Florida bearing the brunt of losses. Why focus on water? Water can be incredibly destructive. So other
than the Campfire back in 2018, which led to extremely significant overall losses the most significant
natural catastrophes Globally in the year 2018 were all water related. As you can see again from data
provided by Munich Re, the global reinsurer, loss events in the United States are not all insured.
Sometimes homeowners and business firms purchase insurance and can recover when they are
harmed by a natural disaster or other event. But in many cases people are not insured and this creates
some significant gaps. So this raises significant questions about how to protect people against these
risks on the coast. And what's extremely interesting is that ecosystem services can promote significant
climate resilience to manage coastal risks. So coastal forests, including coastal reefs and mangroves as
well as wetlands protect the coastline from storm surges that happen on a short term basis as well as
long term effects of sea level rise. One recent study found that coral reefs, like the one in the picture
of the lower right can actually reduce the impact of coastal risks in the United States by 50%.
Wetlands reduce flood risk to nearby properties, and vegetation planted properly or in its natural state
can likewise reduce the risk of coastal landslides. So ecosystem services perform many of the same
functions that we might think we would need to build significant gray infrastructure like seawalls or
berms or other kinds of barriers. These natural ecosystems provide the same kinds of services for a lot
less money. So one recent study demonstrated that one area marked in dark red Hamilton Township in
Atlantic County, New Jersey, avoided losses of almost 139% in terms of property damage. As a result
of the wetlands that protected that region from storm surge. The wetlands are marked in green. If the
wetlands had been lost during a storm that township would have faced far greater property damage
than it did. So one study by the Nature Conservancy explains the ways in which coral reefs act as
natural seawalls. What they do, as you can see in the picture in front of you is they act kind of like a
natural barrier that absorbs energy from waves. And a healthy reef has been demonstrated to be able
to absorb up to 97% of wave energy. Whereas a degraded reef, a reef that is somehow damaged or not
at full health is not able to absorb the same amount of wave energy. This is in addition to the fact that
the coral reef provides habitat for aquatic life. Here in lies the vicious circle of ecosystem services in
the climate context. Coral reefs protect the coast from storm surges and sea level rise, as we've
demonstrated. But coastal forests and coral reefs are themselves subject to damage from these very
same increasingly intense storms. They can be, coral can break off, they can otherwise be damaged.
And a damaged coral reef cannot protect the coast as effectively as a healthy reef. So what does this
mean?

One meter of lost height of a coral reef can lead to up to 300% increase in storm related losses for the
upland properties. This is again a study from the Nature Conservancy based on a study of a coral reef
in the area of Puerto Morales, Mexico, near Cancun. So what are the implications of this vicious
cycle? What do we need to think about? First, obviously we want to prevent damage in the first place.
But second, if a reef is damaged and can no longer provide the ecosystem services to protect against
coastal flood risk, then we need to think about quick restoration.

Aula 3

I​ f our focus is either on preventing damage or providing the funds for quick restoration, this raises the
question of whether existing public law rules are adequate to meet these needs. There are a number of
different public law rules that affect ecosystems in the United States and I want to just talk briefly
about each of these so that you can understand the scope of public governance as well as the ways in
which that public governance regime is not adequate to address coastal risks from climate change and
the protection of ecosystem services. One example on the governance continuum for ecosystem
services is a form of prescriptive rules in the Endangered Species Act. The Endangered Species Act is
a federal statute that prohibits the "take" by any person of an endangered species, but it also protects
against and outlaws the jeopardizing of what's known as critical habitat by certain types of actions. If
an ecosystem provides critical habitat to an endangered species, the Endangered Species Act may be a
tool that can help to prevent damage. But what are some of the limitations on this form of law? The
first is that it's not absolute protection. The government can authorize the take by any person of an
endangered species and can also authorize the jeopardizing of critical habitat, as long as a habitat
conservation plan is put into place. There are other exemptions, for example, in the sake of protecting
national security, but these are small potatoes. The biggest problem is that the Endangered Species
Act only prohibits actions by persons or agencies. It does not protect against harm caused by extreme
weather events. The second major problem is that the Endangered Species Act only protects
ecosystems that serve as habitats, so doesn't specifically protect other ecosystem services. Finally,
there are other problems in that it doesn't necessarily provide compensation to address past damage to
an ecosystem. This one doesn't really get us there. A second option on the governance continuum for
ecosystem services is the regulatory permit scheme set up in the Clean Water Act. This is a broader
system than that of the Endangered Species Act, because the Clean Water Act regulates the discharge
of what's known as dredged or fill material into the waters of the United States and the term waters of
the United States includes some wetlands. This system protects all ecosystem services that are
provided by those covered wetlands. The idea is that a developer, for example, a real estate developer
who wants to build a shopping mall in an area that contains a wetland would first need to get a permit
from the federal government before putting some fill material into the wetland and by putting fill
material into the wetland the wetland would no longer be able to serve its purpose of absorbing storm
water and flood water in the case of a storm surge. What are some of the limitations of the Clean
Water Act permit program? Like the Endangered Species Act, this only acts on the actions of persons.
Meaning, it only prohibits persons from harming wetlands in this particular way by putting dredge or
fill material into them. It does not prevent or protect against harm that's caused by extreme weather
events. Second, the Clean Water Act does not provide any funding for restoration of wetlands that
have been damaged, and as with the Endangered Species Act, there is a permit system which means
that the federal government can provide a permit to an entity that wishes to fill in a wetland. The
protection of the wetlands is again not absolute. A third example on the governance continuum for
ecosystem services is what's known as Payments for Ecosystem Services or PES. Payments for
Ecosystem Services can either be a system of public law or a purely private market-based system. The
idea is that there is an agreement between the beneficiary of the ecosystem services and the entity on
whose property that ecosystem exists. The beneficiary pays the person or entity who owns the land
that provides the service. A few examples of public programs for Payments for Ecosystem Services
exist. One is the United States Conservation Reserve Program. In this program, the federal
government pays farmers to promote conservation of topsoil as well as wildlife habitat on their
farmland. Other countries also use payments for ecosystem services to protect ecosystems from
degradation and damage. Australia has a program that conserves native vegetation on private land by
paying landowners not to harvest the vegetation. Costa Rica has an extremely well-established
program since 1997 that has paid private landowners to provide what's known as carbon sequestration,
the sinking of carbon biodiversity conservation, and aesthetic services to promote tourism as well as
other environmental benefits. There are other programs in other countries as well as private
market-based approaches. The benefit to ecosystem services of these PES or Payments for Ecosystem
Services programs are that the private land owner receives some money or value for conservation of
the ecosystem that's providing the services. But what happens if no one owns the ecosystem? This can
be a serious problem if what we're talking about is a coastal ecosystem like a coral reef that doesn't sit
on anyone's land or property. Another option on the governance continuum for protecting ecosystem
services is using private property ownership or land acquisition. Either public actors like state, federal,
or local governments, or private actors, like conservation organizations, for example, The Nature
Conservancy, or a local land conservation organization can actually purchase the land or an easement
for land conservation to protect a particular ecosystem from damage. This often involves, if the
government is involved, what's known as the power of eminent domain, meaning the power to
condemn property even if the landowner does not willingly wish to part with it. This system of land
acquisition in fact, is what the City of New York did to protect its water supply. When faced with the
choice of spending billions of dollars to build a great infrastructure water treatment plant , instead,
New York City spent hundreds of millions of dollars to acquire land in the Catskill/Delaware
Watershed and to ensure therefore that harmful pollutants didn't enter New York City's water supply in
the first place. One of the benefits of a land acquisition program for conservation of ecosystem
services, private landowners receive value for the conservation of the ecosystems that are on their land
and this is a way in some cases for governments to step in and get involved, but there are limitations,
again, what if no one owns the ecosystem? What if it's a coastal ecosystem that exists in the water
rather than on private property, and this can also be over protective. It may end up being very
expensive to purchase a large portion or parcel of land if the ecosystem only resides on a small portion
of that land. By and large the examples on this governance continuum are examples of programs that
attempt to prevent harm to ecosystems in the first place, by preventing persons from dumping
pollution or filling them up or taking the species or destroying the habitat. What about restoration?
We've talked not only about prevention of harm but also ecosystem restoration if it has been damaged.
There are actually provisions in US law for what are called natural resource damages in two statutes,
the Superfund statute and the Oil Pollution Act. Both of these statutes have provisions where the
overarching aim is an incentive-based system to prevent damage by deterring actors from harming a
natural resource in the first place. But these statutes also provide for restoration of damaged
ecosystems services by providing funding for their restoration if they've been harmed. Natural
resources under the statutes include, land, fish, wildlife, biota, air, water, and other such resources
belonging to, managed by, or held in trust by, or otherwise controlled by the United States or a state
local or tribal or foreign government. In contrast to the governance tools that I mentioned earlier, the
benefits of natural resource damages provisions in these two statutes are that they provide funds to
restore these ecosystems if damaged to their baseline conditions, but there are some significant
limitations. The most significant one is the timing. The natural resource damages assessment
generally follows after a cleanup. Again, if we're talking about the Superfund statute or the Oil
Pollution Act, this is after an oil spill or a release of hazardous chemicals. This ultimately can take
years. It can take years to clean up or restore a damaged ecosystem. If we're talking again about a
coral reef that's providing benefit to a coastal set of property and land owners, years may simply be
too long, we need funds for quick restoration. What about disaster relief programs? In the United
States, under a law called the Stafford Act, there are programs that address physical dislocation from
intense storms, sea level rise, tornadoes, wildfires, including loss of livelihood and lost income. What
happens in these cases under the Stafford Act is that the Federal Emergency Management Agency
steps in and the federal government makes either a declaration of a major disaster or a declaration of
an emergency, and without going into all of the details about these two different types of disaster relief
programs, each one unlocks certain funding for individuals and households and business owners
who've been harmed by an extreme weather event. This could include repair and restoration of
facilities, rebuilding of roads, etc. But these disaster relief programs simply don't cover restoration of
ecosystem services or habitats that have been harmed. Again, these fall short at meeting the two goals
that we identified, prevention of harm or prevention of damage and quick restoration. The key
takeaway, is that existing legal tools are inadequate to meet the two challenges that we have identified.
They generally focus on harms that had been caused by persons rather than harms caused by extreme
weather events. The existing programs that do provide for ecosystem restoration can take years and
not days or weeks to restore the damaged ecosystem. Even disaster relief programs, tend to focus on
helping people and rebuilding property or gray infrastructure but not restoring damaged ecosystems.
Now each of these programs is a worthy program in and of itself to meet the goals that it has set out
for itself, but if we're talking about the goals of quick restoration and preventing harm we need to look
elsewhere.

Aula 4

Recognizing the fact that existing public law rules are insufficient to address the twin aims of
preventing harm to ecosystems and quick restoration that we've identified, what I want to do now is
turn to insurance which is not usually a tool in the ecosystem conservation universe, but I argue in a
paper with Carolyn Kousky called Insuring Nature that it ought to play an increasingly significant
role. The primary goal of insurance is to transfer or spread risk, and it can provide access to
substantial capital in a disaster situation when such capital is most needed. But there are certain
conditions of insurability, one condition is that the largest possible loss should not exceed the insurer's
assets or capital. It is unlikely that an insurance company is going to write a policy to protect against
the event of nuclear war. If there were a disaster in which everyone were harmed to essentially a
complete loss this would likely exceed the insurer's assets or capital. Second, the average loss needs to
be determinable and quantifiable so that it can be priced. If it's impossible to determine how large the
average loss will be, an insurance company is not likely to provide a policy. Risks need also to be
independent and not correlated; what does that mean? This is the idea that risk pooling is possible. If
everyone suffers a loss at the same time this could bankrupt the insurer which would have to pay out
all of the claims at the same time. An insurance contract also should not motivate policyholders to
take an increased risk. This is what's known as moral hazard. An example of moral hazard would be
the idea that, let's say I'm a driver and I get car insurance, as a result of knowing that if I get into a
wreck from speeding my insurance is just going to cover it and it's going to repair the damage at very
low cost to me. If I then decide to drive recklessly as a result of having an insurance policy, this is
what's known as moral hazard. Insurance companies don't want to motivate policy holders to take an
increased risk. Then finally a market must exist, it cannot be unraveled by what's known as adverse
selection. Adverse selection arises as a result of the fact that the people or entities purchasing
insurance know more about their risk than the insurance company. The concern would be that only
high-risk individuals enter the pool. This was the motivation in the Affordable Care Act for the idea of
the mandate that everyone must purchase insurance. The concern was that if only the sickest
individuals purchase insurance this could lead to market unraveling. There are two primary insurance.
The one that we're all most familiar with is what's known as indemnity-based insurance.
Indemnity-based policies guarantee payment in an amount equal to the actual loss sustained. Car
insurance and homeowners insurance generally are indemnity-based policies. Let's say my car gets
into an accident or a tree falls on my house, in this case the insurance company would send a loss
adjuster to my property to determine the amount of the damage and they would write a report
evaluating and stating what the amount of the damage is and that would be the amount that's covered
under the policy. As a result, the owner of the insurance policy, the insured, would receive an amount
that accurately reflects the damage to the property, but this can sometimes be slow to pay out. There is
however a second type of insurance policy that is called parametric insurance. A parametric insurance
policy pays out the insured when a certain predefined triggering event occurs regardless of the actual
level of loss. The trigger needs to be an objective measure of some disaster occurrence. This could be
something like a wind speed in a particular location or the height of waters on a rivers flood gauge.
These are objective facts that can be determined. Once that wind speed has been exceeded or the
water height has been exceeded, the parametric policy will pay out an agreed upon amount of funding.
Now parametric policies as a result can pay out much more quickly than indemnity-based policies.
Essentially, once the trigger happens the policy should pay out, there's no need for a loss adjuster to
come and visit the property. But unlike indemnity-based insurance, parametric policies are subject to
what's known as basis risk. Basis risk is the idea that the payout will not match the actual damages. If
the policy amount that is paid out when the wind speed exceeds a certain amount, if you
underestimated what the damage would be and agreeing to the amount in the policy, there's the
possibility that all of your loss simply won't be covered. How does insurance add value, again,
bringing this back to the context of ecosystem services and climate change. Well, there are really two
options. The first is using a standard insurance policy on property and providing financial incentives
for ecosystem protection or restoration. For example, imagine that I'm a business owner, I could
purchase property insurance. If there are ecosystems that provide protection to my insured property
then the insurance company could charge me a lower premium for ensuring the protection of those
ecosystems, whether that means a wetland or a coral reef etc. This creates incentives for me as the
property owner to conserve and protect the ecosystem. There are examples of these financial
incentives type programs to address climate risk; one is the firewalls program. The insurer, USAA,
actually provides discounts on premiums to policyholders who live in communities that participate in
the Firewise program. Participants in these communities have to undertake certain activities like
landscaping that will reduce fire risk to their properties, therefore the insurer benefits because there's a
reduced risk of fire and a reduced risk that they will have to pay out. What are some of the challenges
of using standard property insurance and these financial incentives approaches to address the twin
aims of preventing damage to ecosystems and ensuring quick restoration if they are damaged? Well,
the big one is a mismatch in scale; what do I mean by this? Ecosystems don't necessarily exist only on
a single property, they can be regional in nature, they can cross property lines, they can cross national
boundaries or state boundaries. But insurance for property is generally purchased by an individual or a
single firm. This can be problematic as a result if only some of the property owners engage in the
incentivized activity to protect the ecosystem. One solution to this problem might be involving
governments to address this problem and there are examples of government involvement in insurance
programs, it's not always purely private. There are systems in which governments actually do mandate
the purchase of insurance such as, for example, the National Flood Insurance Program. The second
approach is the most innovative form of insurance and this is the idea of ensuring ecosystems directly.
What do I mean by this? How is it possible that an insurance company could write a policy for a coral
reef. Well, this has actually been done. The idea is that the policy covers a spatially delineated area
against damage or degradation and the idea is that a parametric policy is used in order to ensure a
quick restoration. In these cases insurance is possible even if no one owns the resource. What are the
challenges with this approach? First, it's necessary to find an entity with an insurable risk that is
willing and able to pay the premium to the insurance company. A second challenge is that the policy
must be worth it to the entity purchasing the insurance policy. It has to add value. If it's actually quite
inexpensive to restore a damaged ecosystem and the entity benefiting from the services provided by
that ecosystem can simply pay out of pocket to restore it, it's not really worth it. The cost of
restoration must be high enough to make it worth it to purchase an insurance policy. Finally, the
insurance payout has to be quick. At least in the case of a coral reef restoration must be undertaken
quickly, we can't be in a situation where we're waiting months or years, otherwise it doesn't really
serve the purpose. There's actually an example of a parametric insurance policy for a coral reef in
effect and it's under the auspices of the Mexican Coastal Zone Management Trust. The area that you
can see in front of you and the picture on the left is an area near Cancun Mexico called Puerto
Morelos. Scientists observed that when a number of intense hurricanes and storms hit Mexico that the
area around Puerto Morelos suffered much less severe damage than many adjacent areas. As you can
see the pink dotted line in that image on the left is a coral reef that protects the beaches. The images
on the right are of the coral reef itself you can see that there is a series of hotels on the beach right at
the shoreline and those hotels are there for tourists who want to visit the beach or even do snorkeling
or scuba diving in the reef itself. Those hotel owners benefit in two ways from the coral reef; the first
is when the coral reef provides aesthetic and recreational services to those visitors who then pay to
stay at the hotels. Second, the coral reef acts, as we discussed, as a natural seawall to protect the
upland properties against storm surges. The collaboration to create the Mexican Coastal Zone
Management Trust began in late '80s. The Nature Conservancy observed based on its work in Mexico
that there were significant damages as a result of a number of hurricanes. However, in 2009 The
Nature Conservancy began its coastal resilience science and implementation on the coral reef in this
are, and later in 2012 established a risk and resilience team that began exploring innovative policy and
financial mechanisms to address coastal protection. In 2016 scientists working with The Nature
Conservancy completed a study of the protective effect of this reef near Cancun and outside of Puerto
Morelos, Mexico. The study determined that storm damages to the upland properties could possibly as
much as triple if the reef are lost. As a result, The Nature Conservancy began to work with other key
stakeholders including the government of the State of Quintana Roo, an insurance company called
Swiss Re, and others to begin thinking about how to ensure the protection of this coral reef if it were
damaged. How does the fund work? Key stakeholders including the State Government of Quintana
Roo, Mexico, The Hotel Owners Association, The Nature Conservancy and the entity that manages
the coral reef, The Reef Park, contribute funds into the Coastal Zone Management Trust. The Coastal
Zone Management Trust then purchases a parametric insurance policy that's triggered by wind speed
over a certain amount and objective trigger for the policy. If the policy level isn't triggered the Coastal
Zone Management Trust can act as a self-insure, the funds in the trust can be used to do lower-level
restoration of the coral reef if needed. This insurance policy is actually in effect as of June 1st, 2019.
A local insurance company has written this policy, the beneficiary is the Mexican Coastal Zone
Management Trust and the assets that are covered by the policy are the reef and the beach. Because
it's a parametric policy, again there's a payout limit that is agreed to and that amount is $3.8 million.
The payout structure depends entirely on the wind speed. If the wind speed near the reef and beach
ranged from 100 knots to 129 knots 40 percent of the payout is provided. If the wind speed is between
130-159 knots, there's an 80 percent payout. If the wind speed exceeds 160 knots to 100 percent of
that $3.8 million is paid out. There are teams of experts in reef restoration known as Brigodores, who
stand at the ready to reattach coral in the event that the coral reef has been damaged. The quick payout
is really essential here. What are the value and values that insurance ads in this context that other tools
like the public law statutes I reviewed earlier can't provide? On the positive side insurance provides a
tremendous amount of transparency, accountability, and speed. There's no need to wait for the ledgers
of government to say, "Oh my, the coral reef has been damaged, we need to appropriate funds to
protect it?" Instead, there's a guaranteed payout triggered by objective measures that can be speedy,
this is all public information and so everyone in the community knows precisely how much money
will be paid out when these objective triggers are reached. In addition, insurance can provide positive
transnational impacts. I talked earlier about the idea of mismatched scale where individuals or
business firms can purchase insurance policies that cover their property, but ecosystem sometimes
span many properties. In this case, imagine that the coral reefs spans the border between the United
States and Mexico, it would still be possible for entities on either side of the border to collaborate and
purchase a parametric insurance policy. Insurance definitely provides value in the twin aims of
reducing harm and providing funding for quick restoration. There are however other values to
consider. On the notion of what's called environmental justice, thinking about the distributive impacts
of environmental benefits and harms. This insurance policy needs to be purchased by someone and it
needs to be purchased by someone or something or some group of someone's who have the means to
purchase an insurance policy, so only those who are willing to pay for an insurance policy are able to
benefit in some sense from the parametric insurance for nature model. On the flip side however,
remember coral reefs and other ecosystems are public goods so it is entirely possible that that coral
reef which is being protected by an insurance policy purchased by a group of hotels as well as
government actors is actually providing protection to other a plan properties owned by those who are
unable to purchase an insurance policy themselves. Finally, I want to make one note of the idea of
expressive content; so what does expressive content? It's the idea that insurance for nature arguably is
providing some expression of support that nature itself deserves to be protected and not just private
property. On the flip side when we think about ecosystem services, ecosystem services has a concept
is anthropocentric in nature. It's not entirely about nature as an end in itself but also about nature as a
means to an end of human benefit. The key value of insurance in this context really is the
transparency, accountability, speed, and potential for transnational impacts. On some other values its
impact may be more mixed. This raises the question, if there's one insurance policy out there for coral
reef; is this a model that's actually generalizable? My co-author Carolyn Kousky and I, and our paper
argue that this is a generalizable model but that there are five key factors that need to be in place in
order for this to generalize. The first is that there's actually an ecosystem that's at risk of a natural
disaster and the natural disaster has to be something that is insurable, meaning there has to be a risk of
harm and not a certainty of harm. No insurance company is going to write a policy if the harm is
certain for anything less than the full cost that they will ultimately have to pay out. There has to be a
risk and not a certainty. Second, there actually needs to be an entity or group of entities that benefits
from the continued provision of ecosystem services from that system, so in the case of the Mexican
Coastal Zone Management Trust the The Hotel Owners Association obviously benefit from the
protection of the coral reef as well as from having a healthy coral reef in the first place that is why
they were willing to contribute to paying the premium. Third, access to rapid funding after a disaster
could actually finance restoration efforts. When we're talking about a coral reef, a coral reef can have
damaged coral be reattached in other cases we can think about planting saplings after a forest fire or
re-establishing dunes that had been damaged by coastal storm surge but, not every ecosystem is
capable of rapid restoration. The fourth point is that quick restoration would actually be difficult to
self-fund, so it has to be sufficiently expensive for the insurance policy to be worth it. Finally,
beneficiaries are going to need to come together to overcome free riding problems in order to
collectively finance premium payments. This suggests that in some cases a government entity may be
needed in order to overcome the collective action problem just as in the case of the Mexican Coastal
Zone Management Trust where the state within Mexico of Quintana Roo government participated in
the creation of the trust in order to help overcome these collective action and free riding problems.
Other potential applications of insurance for nature include protection of forests after wildfires, dune
restoration, and protection of certain ecosystems after earthquakes. I'd like to leave you with four key
takeaways in Module 3. The first key takeaway is that business leaders need to think not only about
mitigation but also about climate resilience and what you all or they all can do to promote climate
resilience. Second, ecosystem services provide essential climate resilience. We need to be thinking
about green infrastructure and not just gray infrastructure. Third, one specific tool that I've gone into
detail on today private insurance can add value to the protection of ecosystem services particularly in
the climate context. Finally, I'd like to leave you with the broad point that business leaders need to be
thinking creatively and collaboratively about climate solutions.