Rachel Cleetus: The human spirit is resilient. Our minds are engines of ingenuity. We are problem-solving people. This is a big problem, but the wonderful thing about the science is it's telling us what's coming our way. So we have time to act, and let's use that time wisely. No time to waste. Let's get moving right away.

David Abel: I'm David Abel and this is "Climate Rising," a new podcast from Harvard Business School. On this show we talk to leading thinkers from the worlds of business, academia, and environmental groups, exploring what businesses have done, what they can do, and what they should do to confront climate change. Today, we're discussing how businesses can cope with the potential costs of a warming planet.

David Abel: Here's what's at stake. The most recent national climate assessment estimates that the United States has $1.6 trillion in real estate, roads, and other assets that are vulnerable to the effects of climate change. Those risks are already clear in places from Cape Cod to Miami Beach, where increasing coastal erosion and greater sunny day flooding are regular facts of life. To be able to withstand rising seas and stronger storms, our communities and our businesses must become more resilient. That will require major investments, which we're already starting to see. Miami Beach, for example, has already spent more than $500 million on elevating roads and installing pumping systems. Much more spending will be needed in the coming years throughout the country, and that will require difficult decisions about what kind of investments are necessary. One of today's guests, John Macomber says, "Businesses have four options to deal with climate change: reinforce, rebuild, restrict, or retreat." By that he means businesses must either invest in shoring up their operations or scaling them back. At the moment he says, "Most are doing nothing." In addition to Macomber, who's a senior lecturer at Harvard Business School, joining us to discuss this need for resiliency is Rachel Cleetus, the policy director of the climate and energy program at the Union of Concerned Scientists, a national advocacy group in Cambridge, Massachusetts. Thank you both for joining us. Rachel, having written a number of reports on the subject, can you please start by telling us how you define this idea, this notion of resilience?

Rachel Cleetus: So from my perspective, climate resilience has multiple dimensions. We're obviously talking about individual communities and their ability to withstand harmful climate impacts that are worsening as carbon emissions rise, but it's about more than coming back to business as usual. We can't just be thinking about maintaining the status quo. We really have to recognize that with climate change, we are talking about a world that's really changing. It's already changed. And that's going to require more than individual actions. It's going to require societal-level changes to our economic systems, to our institutions, our governance structures. And one thing that I've heard from communities on the front lines of these risks, often low income and communities of color, saying that just getting back to status quo with all its existing social and economic inequities is just not good enough. We have to make sure that these communities are participating fully in this low-carbon, climate-resilient future.

David Abel: John Macomber, your career has spanned the real estate and technology industries, and you've thought a lot about the impacts of climate change on insurance markets, transportation, and other sectors. Can you tell us how you define resiliency, whether you have any distinctions from what Rachel said and what you think policy makers, business leaders, and others should be focusing on now.

John Macomber: Sure. Thank you. And thanks for having us. So I define resiliency in sort of the lay application as the ability to bounce back after a stress or a shock. So a stress or a shock might be a storm or fire or floods or something like that. Another aspect to it is the cost to prepare is usually quite a bit less than the cost to respond. So part of what I'm interested in is how people can think about these things ahead of time. My approach is much more from the financial point of view. I'm a finance professor here and came from the property industry. So I'm often thinking about finance in physical assets because that gets people's attention sometimes better than talking about human beings. But actually what we're looking to do in the world, as Rachel says, is to protect and improve life for human beings. So the things that policy leaders in business others should focus on now that I've been thinking about are largely around how to make decisions going forward because it appears that society probably can't defend in place every asset and every person along the coast of the United States and every other nation in the world that has a shore. So therefore, how do you think which assets to defend when, which things to move, which things you might say should be allowed to depreciate quietly and we move on and do that in some kind of plausible or equitable way. So a lot of this has to do with probabilities. A lot of it has to do with timescale, but there is a decision methodology for this. And what I've been thinking about is how can we think going forward about what makes sense for everyone.

David Abel: And can you just give us a sense of what should be a priority now? I mean, we are getting to a point where we're talking about a really short time span in which we could be seeing more and more catastrophic consequences from climate change. What needs to be the priority today in the next few years?

John Macomber: What needs to be the priority is thinking about what projects would be selected. So the selection process of it looked at a national level about how do you think about maintaining the lifestyle for the greatest number of people would be one way to invest in projects. Another would be to say how do we defend the most economically valuable assets like airports or subways. A third would be to think how do the generators of employment or economy get defended. Those are three really different approaches, and there isn't really an idea about how to look at any of those first. So what happens instead is that the organizations that can think about it go ahead and invest. So you saw the famous pictures after Hurricane Sandy where in New York City lower Manhattan two buildings were brightly lit, the Bank of America building and the Goldman Sachs building. That's because those were wealthy organizations who thought ahead to make their buildings more resilient and to have backup power systems and to put things upstairs. The organizations with access to capital and access to information will go ahead and invest on their own behalf, as they should. That will necessarily lead to the optimal outcome for everybody.

David Abel: Rachel Cleetus, one of your recent reports is titled "Underwater," and that provides a detailed look at how rising seas and increased flooding will affect regions throughout the country. Can you lay out the biggest challenges ahead and walk us through some of the reports, conclusions? And can you spell out the parts of the country likely to be hit hardest by climate change?

Rachel Cleetus: Sure. We released this report last summer. And what we were trying to do was point out that well before places go underwater. They will start to see such frequent disruptive flooding, high tide flooding. Sunny day flooding is another term people have used because sea levels are rising that it's going to really disrupt livelihoods, economies, people's homes, infrastructure, etc. And what we set about doing was taking data from NOAA, looking at sea level rise projections, and marry it with data from Zillow, property data, commercial, and residential real estate data along the lower 48 coastline, to look at what gets flooded. And what we found was that well within the lifetime of a mortgage, so by 2045, we've got more than 300,000 homes and commercial properties that are at risk from this high tide flooding. And that's going to be about $136 billion worth of real estate at current values. And by the end of the century, we talking about 2.5 million homes and commercial properties, over $1 trillion worth of real estate. That's pretty profound, not just for the properties themselves that are at risk, but what that signals for the communities in which these properties are located, the infrastructure that's near these homes and the fact that this is tied to the local tax base, for example. So that means the tax base is at risk, and communities may be less able to fund things like schools and emergency services. It also means that this is tied to broader financial implications because of course there are mortgages tied up with these homes. A lot of us have real estate in our retirement portfolio that might be at risk. The taxpayers in general might be at risk as some of these places start to really struggle and need federal help. So we can see this problem coming because the science is very clear about sea level rise, especially by midcentury. We know that we have baked in a lot of the sea level rise because of our current and past emissions. We do have choices about the kind of sea level rise we might see by the end of the century if we curtail our emissions. And what we grasp from this research was the human dimension of what this meant. This means we've got a lot of people, a lot of property, a lot of people's cultural identity tied up in the coast that is greatly at risk. The most important thing we can do now is really make sure that this risk is communicated clearly well ahead of time so that people have a chance to make decisions about what they want their future to look like. Is that future about staying in place and building seawalls and elevating homes in some of the highest risk places? People are going to have to start grappling with the fact that they might have to move. Where are they going to go? What are going to be the new jobs and infrastructure in this place?

David Abel: Are there any places you would advise against buying coastal property?

Rachel Cleetus: Well, I'm not in the business of creating the next real estate bubble, but I would say it's pretty clear in many communities in Florida for example, where places like Miami are already grappling in real time with the fact that, for example, they need storm water pumps. They see flooding in their streets regularly now just during high tides, during heavy precip events. There's real concern about the fact that-

David Abel: By precip you mean precipitation.

Rachel Cleetus: Precipitation, yes. When they have heavy rainfall events or during high tides, they're seeing flooding in their streets. It's coming out through the storm water systems. So they're having to install these very expensive storm water pumps, and they know that there's a time limit on some of these adaptation measures, that the sea is rising, and that ultimately some of these might prove to just not be equal to the task.

David Abel: John Macomber, you've written recently about how developers should go about building in a resilient way and what cities around the world should be doing to become more sustainable as their populations are expected to double to some 6 billion people by 2050. Can you explain some of the main challenges confronting developers and cities and give us a sense of what needs to be done here and abroad?

John Macomber: Part of it I think starts with, in a sense, developers and cities can look at all these things as probabilities. So in a sense it's not helpful to wait until the one path becomes clear and all the politicians are done arguing about it. Instead, it's an issue of decision making under uncertainty, which investors do all the time. You don't really have to know exactly what's going to happen. You can think there's a probability that storms will increase or that the sea will go up, and there's a probability that it will not, and you can adapt that probability based to your own thinking. That's what makes markets. So in terms of what cities have to do going forward and populations, there are four trends that I study all the time. One is massive urbanization. It's hundreds of millions of people move to cities seeking opportunity all around the world. Now the second is resource scarcity. There aren't enough clean air, clean water, land, energy, food, and there's too much garbage and too much traffic. So ideally you'd think that governments would go ahead and build out the infrastructure that we all need to address this, using their taxing authority and based on evidence and consensus doing these things going forward. That doesn't seem to happen. It doesn't seem to be evident. Then you add onto that the fourth trend of climate change, which could exacerbate urbanization and migration and the fact that governments are stuck. A lot of what I think about is how will private investors and all this capital in the world address these issues. And it's a city scale solution in my view, largely because cities generate most of the greenhouse gas in the world. They generate most of the GDP in the world. They also tend to be the political unit that's more responsive many times, and investors understand a city scale investment like a power plant or a road or bridge or water or something like that more than they understand a federal scale thing.

John Macomber: So the cliche answers are thinking about optimization, about how we can do the most good for the most people, and those remain even in a climate-challenged environment around good density buildings. So people are close together in a way that's aesthetically pleasing and not just stockpiled, combined with transit combined with energy. So it's whole system thinking. There are lots of worthy projects, and many of them should be bankable. There's also a lot of capital in the world. There's 10 or 20 trillion dollars of fixed-income investments earning two and a half or 3% yield.

David Abel: Let's take it down to just the individual homeowner. Will it be difficult to obtain mortgages in the coming years? And do expect that to play out in a relatively brief time period? What are we talking about in terms of a time horizon?

John Macomber: Well, in talking about homeowners first let's imagine homeowners with no debt and no insurance, kind of like pioneers back in the old days, or like lots of people in the rest of the world that don't have access to those things. Pretty much people don't build flimsy houses in dangerous places, or if they do they expect the consequences. They don't expect anybody to bail them out. You look out for yourself. You don't build in the danger zone. Or if it looks like the danger is going to get worse, you move while you can still get some value. These things really get altered or changed by the fact of mortgages and insurance requirements. So in the United States, a lot of people might have a 30-year mortgage backed by Fannie Mae or Freddie Mac, and then also might have insurance provisions that you have to have fire insurance and homeowners insurance and maybe you have to have flood insurance.

John Macomber: So if the base flood elevation requirements rise, and now your house is out of compliance, what do you do? Does the bank foreclose on you? Are you forced to somehow harden your house? Do you have to move? Those kinds of things I think will have tremendous impact on homeowners and also on the entities that hold 20- or 30-year mortgages. This will become very apparent in my view, and probably in Rachel's view too, to those entities in the next zero to 10 years. Even though the impact on some of the houses might not play out until 50 or 100 years from now, because nobody's going to want to be holding 30-year paper on mortgages that are figuratively and literally underwater. At the moment, it's not beneficial for anybody in the housing industry or any politicians to sort of draw attention to that fact. So that's why the work of people like Rachel is so valuable in helping the regular person be informed and make some good decisions about some of these things before they get distorted by strange things in the insurance market.

David Abel: Rachel Cleetus, when we talk about climate change, we often focus on the doom and gloom, but can you give us some sense of the potential opportunities, especially relating to something that you've also worked on quite a bit, environmental justice and finding ways to heal divisions that have existed for generations in many of our cities?

Rachel Cleetus: Sure. To go back to some of the things that John's been pointing out, let's think about all the reasons people are where they are, why are people living, why do they own homes where they are. And you start to see a lot of strands there. There's of course economic reasons people want to be near jobs. They want to be near critical infrastructure. There are a lot of cultural reasons. There is the history of our country's unfortunate racist past, which means that in some places there was mortgage redlining, and people were not allowed to buy homes in certain areas and had to live in other areas, some of which might be more exposed to climate risk, like flooding now. There was the fact that formerly enslaved people were only allowed to own property in certain places. Some of those places in the Eastern shore of Maryland or in the Gulf coast of the US are also places that are at very high risk from sea level rise. And then there are the more recent pieces of our country's history, which is where we've built things like airports and major ports and where Amazon or Google locates their hub and creates a lot of jobs. So all these things pull people to where they are. And when you think about what it'll take when people start to recognize the risk to individual homes or cities or communities, it's really hard because the risk is so widespread to think about individuals getting up and moving in a pioneer fashion. We really have to be thinking about this more collectively because we form societies. People are now living next to other people and draw a lot of value from that. You have your neighborhood school that your kids walk to. You go to the grocery store around the corner, all of these things. So we can't just have a stick approach. Your home starts to go under water. It starts to lose value. Or someone won't give you a mortgage, and then you get up and move. We have to start thinking about a more orderly fashion in which we will have to start disentangling ourselves from these coastal areas. That means building new infrastructure in places where people can go, and that's what I see as the opportunity. We have to be talking about not just coastal retreat but the opportunity of going to places where we can build new economies where people can see a future even as the human dimension of this loss is big because there are parts of our cultural identity that we can't pick up and move. We will lose things that people value deeply, including the social cohesion that they've built as this retreat from the coast happens. But we have an obligation as a nation to create those solution spaces where people can see a bright future. And I often see a lot of opportunities where when we work to cut emissions, we can also be building resilience. You can think of a lot of opportunities where we invest in clean energy that create economic opportunities but on safer ground inland.

David Abel: John Macomber, can you speak more to the coming opportunities for first movers and others who are taking this issue seriously? What kinds of financial instruments do you foresee helping homeowners, businesses, and governments to cope with the challenges ahead? What innovations or changes do you see in the construction, insurance, and transportation industries? Obviously this is a question you could offer a dissertation on, but in the confines of this discussion, if you could give us a sketch of these things, that'd be great.

John Macomber: Well, Rachel mentioned one of the obvious ones is around, well, the obvious benefit is harder to do, is around the new infrastructure for places and building new economies. So an obvious opportunity is in the destination cities. Rachel didn't use that phrase this time, but I've heard it before. There's also a detriment there some of those destinations don't want to see people coming in, but there's opportunities for cities that are competing that way. Less obvious opportunities I think are for financial investors. So they could of course just invest in those destination cities and think that more people are going to go to Massachusetts. They're going to go to Worcester, or they're going to go to Manchester, New Hampshire instead of being in Boston. But you can also make financial bets already and that may accelerate. One example would be on rate or real estate investment trust portfolios. And there are analysts now who will give information about whether they think some real estate investment trusts portfolio is more exposed to a potential climate incidence or storm that another one is. And in theory, you could invest long or positively on the one that you thought was more secure, and you would short-sale the one that was less secure. It's sort of a replay of 2007, 2008 when people were nervous about some of the securities in the housing market and had to find a way too long or short sell that market. Similarly, there could be those kinds of bets on municipal bonds. For the most part, municipal bonds now are rated by the big rating agencies the normal way based on debt service coverage and loan to value ratio, not necessarily climate exposure, which means that a sewage treatment plant in Miami would have the same rating for climate as one in Denver. But it's much more likely that the one in Miami might either get flooded or might see its population depart. Either way, it couldn't cover its cash flow as well. Similarly, Rachel talked a little bit about cities that can't collect property taxes the way they thought because there's a decline in property values. That would impact those cities’ ability to repay their own general obligation bonds, and that in theory would also impact ratings. You can make bets on those things today. There's also another industry that a lot of people are not aware of, which is private climate modeling. So there are three major climate modeling companies who sell information to other players, and most of the big reinsurance companies have their own as well. So all our labs are being modeled by these kinds of companies in parallel to how all this information is collected on us by the big credit card and social network companies. So people have more information than other people do. So broadly there's opportunity if you have lots of capital and access to good information. The flip side, which is the inequity part, is if you don't have a lot of capital or you have bad information, then you have kind of negative opportunities. And that's part of what Rachel and I are both trying to help with is to at least disseminate information so regular people can make good decisions.

David Abel: And from your point of view, Rachel Cleetus, can you give us a sense of any new technologies or specific investments you think businesses and policy makers should be making to address climate change?

Rachel Cleetus: I think the most important investment we need to make right now is making sure that we're communicating the risk well, but also that we're starting that process of a stakeholder conversation that really has community or city scale conversation about building resilience because businesses have a very important role to play, but they can't play it in isolation. Otherwise to harken back to John's original image of after Hurricane Sandy when we had the Goldman Sachs and Bank of America buildings lit up. You get that kind of world where everything is in darkness and two buildings are lit up. And what did that really do for Goldman Sachs? Its employees couldn't get to the building. Infrastructure was down. So you have a Christmas tree essentially. That's not resilience. So businesses can really work in breaking down some of the silos right now that stand in the way of building broad resilience because they have employees, they have supply chains, all of which depend on things that are beyond just their immediate footprint. And to open that conversation, to see ourselves in a world that we're connected and we have to be thinking about resilience as a societal imperative is a very important part of how we're going to have to tackle this challenge. And I see businesses and policy makers working with communities together and building that world.

David Abel: John Macomber, given that emissions are continuing to increase and our ability to curb warming trends seems at the moment dubious, what's your best argument for optimism about the future?

John Macomber: Well, there's certainly opportunity to argue pessimism about the future. In terms of optimism, I look at it in terms of, "Okay, here's where we are. What are we going to do?" And if you look at the optimistic side, historical context, the shores of always changed. People have always migrated. We're six feet tall, but that's not so important to an ocean that's six miles deep or a planet that's 8,000 miles across. In our lifespans, it may be four score and 20 years aren't that important to the planet that's billions of years old. We just happened to be short, but mostly we happen to stack our assets close to the shore where a lot of people stack their assets close to the shore. So perhaps this will mean ultimately the land becomes less of a store of value. People have always thought in sort of historical time that land was a place to put worth. Maybe that's not so. Maybe there'll be other stores of value. I don't know that I'd necessarily be Bitcoin or other moveable assets, or even movable, transportable buildings that aren't necessarily dependent on the location. Or you can imagine where lots of things are sold as a service. You could think of residents as a service, housing as a service, transportation as a service, so that those things move around, and then the values that you bring with yourself individually are more important than the piece of dirt. This also could lead to fantastic new urban forms and a chance to build new in many, many locations if we can plan ahead and think of collective benefit. So if we don't plan ahead and some of the people who have more influence go ahead and do it the way they want it, that isn't necessarily going to come to the best outcome.

Rachel Cleetus: Optimism is hard in the face of these climate impacts that are coming our way. To me what gives me hope is I see people in communities all around the country in the world who are really starting to grapple with the scale of what's coming our way. And that's critical to really engage people in this conversation. So it's not a top down social engineering project, but one in which people see themselves. And to me one of the most hopeful pieces of all this is watching young people in the streets doing climate strikes, talking about this as their future. They are angry at us, our generation that has failed to act and act in a bold fashion. They have no patience for dithering about. They're looking for bold, ambitious visions. And they are not looking to crawl in a corner and curl up. They want a bright future. And so to me it's us leaning into that vision into our children and grandchildren's future and doing what we need to get there. The biggest thing we can do right now is to, first of all, at the highest levels of our US government, this climate denial stuff is deeply, deeply disturbing. We have no time to waste on that kind of rhetoric. We have to be in an action-oriented space, and the human spirit is resilient. Our minds are engines of ingenuity. We are problem solving people. This is a big problem, but the wonderful thing about the science is it's telling us what's coming our way. This is not coming out of the blue. We can see the risks. We have scientific projections about places and how it's going to worsen. So we have time to act, and let's use that time wisely. No time to waste. Let's get moving right away in implementing some of these solutions.

David Abel: And now a story from Mike Toffel, a professor of environmental management at Harvard Business School.

Mike Toffel: The image of the bank buildings glowing in the darkness in the aftermath of Hurricane Sandy keeps popping into my mind. It highlights both the potential of what companies can achieve, but also the limitations of their acting alone. At the most basic level, it provides an example of asset protection. It makes me think of the resiliency framework that my colleague, Professor John Macomber, developed what he calls the “four Rs.” These are: rebuild, reinforce, restrict, and retreat. These companies in New York had the information, the resources, and the strategic foresight to reinforce their buildings with sandbags to prevent flooding and to install backup generators to keep the lights on and their systems running. But how much value did these efforts actually provide? Those buildings certainly suffered less damage, but when you pull back the lens to see these brightly lit buildings sitting in a sea of darkness, this bigger picture demonstrates just how important it is for a company's resilience plans to extend to its community. As Rachel Cleetus pointed out, keeping the lights on in this case did little good when the streets were too flooded for people to get to work and the entire supply chain of goods and services was disrupted. And so to effectively engage in real estate resiliency, managers need to work with policy makers to look beyond their own buildings and employees working within them and to also plan for the flow of their employees, other people, and their supply chain of goods and services that enable the organization to function. Building a fortress is less valuable than ensuring resiliency of an entire community.