- Dr. Jan Whittington focuses integrated capital investment planning for municipalities intended to help reduce financial risks from extreme climate events.
- Breckinridge sees alignment between Dr. Whittington’s work on climate-smart capital planning and its own analysis of the risks that municipalities face from a changing climate and mitigation.
- For municipalities, the approach can improve climate resilience and, reduce lifecycle costs due to damage catastrophic climate events can have on infrastructure and move the municipality toward is emissions-reductions goals.
Dr. Jan Whittington is Associate Professor of the Department of Urban Design and Planning, at the University of Washington, Seattle. Her work focuses on strategies for municipalities to integrate in capital investment planning to reduce infrastructure lifecycle costs, improve efficiency, reduce greenhouse gas (GHG) emissions, and reduce financial risks from extreme climate events. Breckinridge Senior Portfolio Strategist Cara Early and Senior Research Analyst Ruth Ducret recently spoke with Dr. Whittington about the ways her work and Breckinridge’s integration of environmental, social and governance (ESG) analysis influence on security selection and portfolio management.
Cara Early: I learned about your work, Jan, through my colleague Ruth and other members of our municipal research team. Our team regularly engages with municipal bond issuers and stakeholders on ESG topics and developments. Your work with a World Bank initiative to reach 300 cities around the globe and support their development of capital improvement plans during multiple budget cycles that factor in climate risk and resilience plans, piqued the interest of our analyst team.
We believe there is alignment between your approach to climate-smart capital investment planning and Breckinridge’s analysis of the risks that municipalities face from a changing climate as well as their management and mitigation of those risks over the long term.
You have worked with municipalities around the world as well those in the United States. What can you tell us about the progress being made with municipalities that want to take a forward-looking comprehensive budgeting approach to their climate-related risks and spending needs?
Dr. Jan Whittington: Cara, we are working with local governments around the world to help them develop capital plans and budgets that present stakeholders with building options for a low-carbon future. At the core of our approach is a conviction that a municipality’s capital investment planning is key to implementing climate action.
When we think about the cycle of construction‐disaster‐reconstruction that is worsening with the intensification of climate risk due to temperature rise, we think a climate-smart approach to capital investment planning, which includes both elements of adaptation and mitigation makes more sense.
I work directly with governments and their agencies to use tools we developed at our lab at the University of Washington. In short, our programs track three data sets:
- Local government financial history and capital budget projections.
- Localized natural hazards affected by climate change over the next 80 to 100 years, with the financial risks they pose to municipal capital projects.
- Construction design, technical components—we consider issues like mechanical, electrical, plumbing needs—energy efficiency, GHG emission forecasts, and lifecycle costs of common municipal infrastructure capital investments.
Our model does not recommend a single solution for a municipality’s infrastructure needs, rather it presents the city with an array of options noting the upfront costs, resiliency, and climate impact of the available solutions. For decarbonization, we outline the cost of capital with a business-as-usual approach, a carbon reduction scenario and finally a net zero outcome. For resilience, we outline the impacts from exposure to extreme events over the lifespan of the project, and the costs associated with a business-as-usual approach, a more moderate use of design strategies for resilience, and a scenario with design strategies to maximize resilience. Oftentimes the more resilient and net zero designs are synergistic and cost-effective than business-as-usual approaches to projects. This data allows local decision-makers to understand the long-term impact on budgets and financing of capital investment choices made in each budget cycle.
This exercise also produces empirically sound indicators of climate mitigation, adaptation, and lifecycle cost, for each project and the entire pipeline of capital investments. For decision-makers, this is key information that provides a more reliable foundation for their own capital expenditure choices, while allowing the municipality to become more resilient to extreme events and more energy efficient.
Ruth Ducret: What you described Jan are powerful tools not only for local governments but also from the perspective of municipal bond issuers. Their output also can be additive in my own work as a municipal analyst assessing current and future climate risks that issuers are facing.
The capital budgets developed using these tools can demonstrate whether municipal issuers are focused on a comprehensive, wholistic capital planning approach to near- and long-term challenges.
A comprehensive approach to capital investment planning can demonstrate the wholistic integration across all aspects of its capital plan and not simply one-off projects.
The data can also point to climate risks that can have potential ramifications for the creditworthiness of a municipality as well as headline risk that may arise from owning an issuer’s bonds.
CE: Yes, and it also has potential to enhance the municipal bond issuer’s ongoing participation in financial markets, providing investors with additional information for ESG analysis or further substantiating the efforts of an issuer who comes to market with a Green, Social or Sustainable bond issuance. Within the ICMA framework which guide much of the labeled bond market, the model increases transparency surrounding the process for project evaluation and selection. Disclosures driven by data about projects and their long-term resilience and climate impact is additive at the portfolio level for the investor which can help to drive interest in the issuer.
RD: And Jan, your model also integrates near-term goals of the issuer with the practical application of building a long-term, sustainable capital budget with an overarching benefit of reducing costs over the useful life of the projects. The near and long-term perspectives can help municipalities and investors understand project prioritization based on currently available resources.
JW: Those are all good highlights of our work. An important function of our approach is helping local governments generate reports on specific projects and across their portfolios that could be shared with investors and with government agencies charged with reporting on capital market regulators and, perhaps, climate and social impacts.
For example, the datasets include energy efficiency, capital cost, operating cost, maintenance cost, and emissions data of families of technologies common to capital projects including buildings, transportation, energy, water, wastewater, and solid waste.
To understand the exposure of capital projects to growing impacts from natural hazards such as flood, fire, drought, and severe storms, our team downscales global models to produce a full set of forecasts of the impact of extreme events across the jurisdiction we are working with and within the context of contributing areas, such as watersheds for floods.
We assess the magnitude of extreme events reasonably likely to occur during the useful lifespan of capital assets. That insight can help the municipal budget and finance team to know whether the proposed location or design of a project makes the asset vulnerable to damage and the services vulnerable to costly interruptions, with direct financial consequences for local governments.
CE: So, Jan, to summarize, your team’s smart-climate approach seems to encompass three themes for municipal financial planners: first, designing infrastructure investments to reduce greenhouse gas emissions; second, designing and siting projects to increase resilience; and third, prioritizing investments by measuring performance for climate.
For the municipality, this approach can improve climate resilience to hazards while, at the same time, reducing the lifecycle costs associated with damage that catastrophic climate events can have on infrastructure and move the municipality toward is emissions-reductions goals.
For the investor, a capital improvement plan that incorporates all of these elements can provide useful insights during bond issuance when the municipality seeks financing.
RD: Exactly. I can tell you that Breckinridge values this kind of specificity in bond disclosures particularly measurable goals can be reported and monitored over time. Also, a smart-climate planning approach can offer us a view to plans for future projects and insights as to how they are expected to fit together for long-term sustainability, risk management, and spending discipline.
This comprehensive capital investment planning strategy can be more useful in our analysis than, for example, a labelled green bond, which, while important, may be more project specific. We think this integrated approach is more powerful and more meaningful over the long-term. Particularly for local governments and its enterprises, the wholistic incorporation of smart-climate planning could, in theory, allow for all of an issuers’ bonds to be labeled green, social, or sustainable.
JW: Yes, I couldn’t agree more. This is an application of transaction cost economic theory to infrastructure systems, such as transportation, water, and communications systems. The goal is to help municipal budget planners internalize factors in their financial planning and design that historically have been treated as external.
Our core mission at the Urban Infrastructure Lab at the University of Washington is to develop a community of inquiry, learning, and practice that helps urban regions to become more livable, just, economically effective, and environmentally sound through a democratic process of urban design and planning.
CE: It is fascinating work, Jan. Thank you for taking time to talk with us about it. We look forward to our continued engagement.
RD: Yes, thank you, Jan. This approach can be a critical means for local governments and investors to understand the financial implications climate-risks, the best adaptation and mitigation strategies to deal with them, and the financing strategies to achieve them from both the budgeting and capital markets perspectives.
The opinions and views expressed are those of Breckinridge Capital Advisors, Inc and Associate Professor Dr. Jan Whittington of the University of Washington, Seattle.
The opinions and views expressed are those of Breckinridge Capital Advisors, Inc. They are current as of the date(s) indicated but are subject to change without notice. Any estimates, targets, and projections are based on Breckinridge research, analysis, and assumptions. No assurances can be made that any such estimate, target or projection will be accurate; actual results may differ substantially.
Nothing contained herein should be construed or relied upon as financial, legal or tax advice. All investments involve risks, including the loss of principal. Investors should consult with their financial professional before making any investment decisions.
While Breckinridge believes the assessment of ESG criteria can improve overall credit risk analysis, there is no guarantee that integrating ESG analysis will provide improved risk-adjusted returns over any specific time.
Some information has been taken directly from unaffiliated third-party sources. Breckinridge believes such information is reliable but does not guarantee its accuracy or completeness.