Swiss Re on the Adaptation Benefit-to-Cost Ratio

Swiss Re published an article today as part of the World Economic Forum's annual meeting, entitled "What gets measured gets managed – taking the initiative on climate adaptation." Swiss Re makes the case for "a more systematized, universal approach to measuring the impact of disparate climate adaptation interventions." This builds on research from Swiss Re released in November 2023, entitled "We need to talk about climate adaptation: How to rethink benefit cost ratios to accelerate adaptation to our changing climate."

Veronica Scotti, Swiss Re's Chairperson of Public Sector Solutions, points out that climate adaptation not only advances risk management, but can create competitive advantage, support economic stability, create job opportunities and protect the natural environment. Swiss Re argues for creating the structural conditions necessary for private capital to flow into climate adaptation projects, as well as grow and optimize the use of public funds. This includes addressing the fact that, in contrast to greenhouse gas mitigation, climate adaptation measures lack measurable targets/outcomes and standardization.

In the absence of a global standard, benefit-to-cost ratios (BCRs) may present the most practical proxy to evaluate adaptation strategies. BCRs compare the present value of future net economic benefits, discounted for the time value of money and inflation, to upfront adaptation costs. Swiss Re applied BCRs for adaptation to flood and heat waves across a range of studies world-wide and found that the net economic benefits of interventions can outweigh the cost between 2:1 and 10:1, in some cases even more. A wider benefit-to-cost ratio (BCR) model - which is based on a universally valid, easy-to-derive and trackable metric - could drive transparency and comparability for adaptation projects, justifying their financial viability and engaging necessary experts and stakeholders. Swiss Re argues for BCR as part of an adaptation scoring system to measure and track the progress of interventions over time.

Governments are similarly considering adaptation planning measured by BCR. For example, in its first Adaptation Action Plan released in 2023 covering risk prone sectors across infrastructure, health and wellbeing and the environment - the Canadian government found that for every dollar spent on adaptation measures, it can expect to save CAD 15 on direct and indirect benefits.

Swiss Re does caution that it is important to evaluate measures not just on BCRs, but also by the extent of future losses averted. For example, in coastal areas, low-cost sandbags offer a high BCR; but do not substantially reduce risk over the long term. Other challenges include the fact that adaptation projects that the BCR model could inform are often considered as a response to catastrophic events when funding is less available. Furthermore, adaptation projects often do not fit with traditional commercial financing models, as dividends are manifested as avoided loss rather than positive cash flows and the return on investment has a long time horizon.\

Source: Swiss Re, https://www.swissre.com/risk-knowledge/risk-perspectives-blog/climate-resilience-adaptation-measurement.html | https://www.swissre.com/dam/jcr:0ffbaa41-5802-4506-be5a-5952a20deba7/2023-11-14-sri-climate-adaptation.pdf