Financing & Funding Tools: Paying for Equitable Adaptation

Introduction

Events related to climate change, including, flooding, heat waves, and drought, can damage homes, displace communities, reduce water availability, impact public health, and lead to other known and not-yet-known impacts. In the United States, research indicates that such events disproportionately affect people of color and people with low incomes.^{See footnote 1} These groups often have a heightened degree of exposure to impacts and limited capacity to minimize and respond to them. Low-income individuals and families, for instance, are more likely to live in homes without air conditioning and sufficient insulation to keep cool, and, as climate change causes more frequent and extreme heatwaves, these households are at an increased risk of heat stress illnesses, such as heat stroke.^{See footnote 2} 

(Source: MyStrongHome)

Communities and people of color face disproportionate challenges from climate change impacts due to historic and ongoing injustices. These injustices include, for example: restricted access to credit and homeownership; inadequate government and private investment in low-income areas; discriminatory development-related decisionmaking and policy processes that have enabled industrial development and related pollution in close proximity to these communities; and the physical fragmentation and disruption of community cohesion via historic federal funding of infrastructure, (e.g., the interstate highway system).^{See footnote 3} 

Given this reality, funding and financing strategies for adaptation and resilience projects should evaluate equity — attention to disadvantages and injustices — as an underlying principle.^{See footnote 4} These strategies must avoid exacerbating inequities, and prioritize approaches that meaningfully reduce inequities rather than reinforce the status quo.

This chapter provides an overview of the financing options to support equitable resilience and adaptation projects, including (1) bonds and bank loans; (2) insurance-related finance options; (3) tax credits; (4) tax increment financing and land value capture and (5) public-private Partnerships, with case studies that describe how these options were implemented.

Background

Cities, states, and communities can consider funding and financing options for equitable adaptation. This toolkit distinguishes financing from funding as follows:

• Funding refers to money that need not be repaid, (e.g., federal or foundation grants).
• Financing refers to money raised through two approaches that differ based partly on the certainty of repayment.
  • Under the first — debt financing — money is secured through debt instruments, such as bonds or loans, for which the issuer commits to repaying the debt with interest.
  • Under the second — equity financing — money is secured through equity instruments, such as stocks, that give an investor an ownership stake in the asset, (e.g., real estate, for which money was secured). The investment is made with an expectation that money invested will be repaid (with additional compensation), but this outcome depends on the success of the asset.

Public entities can pursue multiple sources of funding and financing for a given activity.

Key funding options for equitable adaptation are identified within other areas of the toolkit — more specifically within the appropriate policy focus area sections, (e.g., Economic Resilience, Data, Metrics & Tools, Resilient Affordable Housing, Anti-Displacement & Gentrification, Natural Resilience/Green Space Access, Resilient Energy & Utility Industry Measures, Resilient Water, Equitable Disaster Response & Recovery, and Health & Nutrition).

As policymakers contemplate approaches to funding or financing adaptation projects, the following questions can guide decisionmaking:

1.  Who benefits? Does funding reflect a priority to benefit disadvantaged communities? And if disadvantaged communities are not benefitting at least as much as (if not more than) other communities, would funding for this project reduce the availability of funding for a project that does ensure such benefits?^{See footnote 5} 
2. Who pays? Are frontline communities, particularly those who are lower-income, more significantly impacted by costs? A requirement that all individuals pay the same amount, regardless of their income level, fails to acknowledge that a dollar for a low-income individual is worth more than a dollar for someone who is not low income.^{See footnote 6} For example, the use of a regressive tax to pay for a resilience measure — a tax that takes a larger percentage of income from low-income earners than high-income earners —would increase inequity.^{See footnote 7} A requirement that all pay the same amount also often fails to ensure that entities with greater responsibilities for harms — those contributing more carbon emissions or that are more responsible for discrimination that led to the marginalization of communities — bear more of the costs to help these communities become more resilient;^{See footnote 8} and,
3. Who decides? Are the processes for making decisions about who benefits, who pays, what is funded, and how activities are financed, responsive to community wishes and needs? Do they support the effective participation of communities, including residents with low incomes, in these processes?

Financing, rather than funding, might be pursued when:

1. Climate adaptation measures require more capital than is readily available at the time, (e.g., funding is allocated to other projects and/or the time period for securing grant and other funding is longer than desired for project implementation);
2. The project is one for which an ‘asset’ that can generate revenues has been identified and can be used to pay at least some project costs;
3. The project is costly and the asset, such as a bridge, has a long life-cycle for which costs can be spread to future users;
4. Financial incentives exist for entities such as insurance companies to participate in a financing approach, and the participation of such an entity can reduce or eliminate costs; and/or
5. Policies or laws provide incentives for investors to participate in a financing approach, (e.g., investments in ‘opportunity zones’ provide tax credits).

As described below, some financing vehicles will secure funds only for smaller projects; such as pump stations, while other financing vehicles will support larger projects, including, for example, seawalls.

Populations served by equitable adaptation projects are, by definition, low-income or otherwise disadvantaged, and, as a result, financial benefits for investors in such projects can be less obvious and direct than for other projects. Nevertheless, various incentives for investors have been identified and pursued, including those involving tax benefits, insurance premiums, and other mechanisms that spread and minimize financial risks. Some approaches involve multiple financial entities, and/or a combination of private and public entities, which work together to fund and implement a given adaptation project. Public entities can act on their own or through engagements with private sector entities, nonprofit organizations, and/or philanthropic organizations to secure financing for equitable adaptation measures.

Key Players

• Federal government – Federal government entities such as the Department of Treasury and FEMA, manage national tax credit and similar financing programs.
• Philanthropic Organizations – Organizations, such as foundations, can provide grants (and investments, see Impact Investor) to facilitate access to additional financing. 
• Impact Investors – Socially-minded investors may be seeking to support an environmental and/or social cause while securing a return on their investment. An increasing number of philanthropic organizations are providing financial support as impact investors.
• Insurance Companies – Companies can insure against risk and benefit from adaptation measures that reduce losses tied to climate change. These companies financially support adaptation measures through reduced insurance premiums.
• Green Banks – Financial entities, including ‘green banks’ and green bank-like entities, can provide loans for, and investments in, resilience and adaptation efforts.
• Community Development Financial Institutions (CDFIs) - Entities such as these can offer financial services to low-income and disadvantaged communities.
• Community Development Entities (CDEs) – Organizations can apply for certification as a financial intermediary that offers financial services to low-income and disadvantaged communities. For example, entities can be certified under the national New Market Tax Credit Program or similar state programs to secure funds from investors and, in turn, fund initiatives in low-income communities.
• Private Sector Entities – Private sector entities can help municipalities secure and repay the financing and are central to most financing efforts. These include entities that provide streamlined services to reduce costs of adaptation measures, e.g., CMC Energy, Corvias, etc., as well as entities that help municipalities identify and monetize environmental ‘assets’ that can be used to finance such measures.