Geosyntec Consultants

Columbia, MD, United States
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  • Economic Opportunity, Energy and Environment

  • United States | Global Programs

  • Economically disadvantaged people

  • Business

  • ---

  • >1,200

Executive Summary

Currently there is no way to price climate related physical risks into valuation and financing approaches used by financial institutions and investors, particularly for physical assets and infrastructure. This results in significant underinvestment in long term projects, including those protecting future generations against climate change impacts, which breeds the false perception that investing in mitigation or adaption of critical infrastructure may not be worthwhile. Our state of the art Decoupled Net Present Value (DNPV) approach can change this, because it translates engineering assessment of physical risks into financial terms, quantifying potential exposure of assets to climate related hazards. DNPV is directly scalable to different geographies and sectors, and can help a multitude of users better understand the value of climate risks, allowing pricing in of such risks by prospective investors. Climate change will affect everything we care about. By pivoting to our robust valuation approach, we can begin to develop the projects that will do most good.

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The Problem

To help addressing climate change impacts, massive investments from institutional investors will be needed. Institutional capital (both in developed and developing countries) is a huge and largely untapped pool of capital that could be used for investment in climate change mitigation and adaptation projects. However, to promote capital flows to solve this issue in a meaningful way, investors need to understand climate risks. Although there is a recent concerted private sector effort to understand how climate change may affect investments (e.g., 2 Degree Investment Initiative, Task Force on Climate Related Financial Disclosures), the focus is mostly at the macro level leaving the root of the problem (i.e., continued reliance on standard techniques to assess the financial viability of long term investments) largely untouched. The use of discounted cash flow (DCF) methods has for many years resulted in severe economic distortions and perverse incentives as the value of the present is overemphasized and the value of the future underemphasized. This leads to a widespread bias favoring short term investment decisions, a phenomenon known as the Tragedy of the Horizon with decisions felt well beyond the horizons of business/political cycles imposing a burden on future generations that the current generation has very little incentive to fix. DCF is also inadequate to compare projects across geographies and technological solutions. This makes it hard to evaluate different alternatives on their merits and often results in a systematic bias that favors cookie cutter investments in well known regions and technologies to the detriment of emerging economies or more sustainable solutions.

Proposed Solution

To improve the risk perception of long term projects amongst institutional investors and lenders, and mitigate the Tragedy of the Horizon dilemma, we propose an open source VMS platform that offers qualified access to projects and funds, with evaluations powered by our state of the art DNPV valuation approach. One of the main restrictions on institutional investment is the quantification and allocation of risk. Typical tools used in project finance (e.g., DCF) lack the ability to estimate and price in risks in a transparent and consistent manner. DNPV allows investors to evaluate long term project investment opportunities across industrial sectors and geographies, making it easier to compare, cross reference projects, and to communicate the results to decision makers (Espinoza and Morris, 2013). Pricing and allocating risks to their rightful owners is amongst the most salient features of DNPV, as this allows standardized contract structuring that can be later modified to provide flexibility among VMS participants. Unfortunately, anachronistic models (devised for simpler investment opportunities in the fifties, an era when simple algorithms were a necessity because computational power was expensive) are ubiquitous. Although computational cost has decreased over 10 billion times in the meantime, which should make it hard to justify using grossly simplified DCF models, moving away from well established practices takes significant time and effort, particularly when existing methodologies are expedient and deeply rooted in public policy. However, the status quo will lead to postponing much needed investments to reduce the risks posed by climate change, unduly penalizing future generations and communities that can least afford it.

Evidence of Effectiveness

At the heart of our proposal is the development of a project delivery platform (online Virtual Market Square, VMS) with valuations powered by the state of the art DNPV approach. Examples of virtual markets abound, from the high profile NASDAQ to the more specialized research oriented Iowa Electronic Markets. The proposed online VMS platform will not only serve as an investment platform but as a social network where investment professionals, technical experts, project sponsors, and development agencies will be able to communicate and discuss project development opportunities in regions of interest in a common space, thus reducing the barriers to identifying investment/project partners. Engagement of additional partners and/or collaboration with organizations with similar goals/ideas could significantly increase the leverage and the impact of the VMS. Of particular relevance are the World Bank's Global Infrastructure Facility, the Global Infrastructure Hub, and Aligned Intermediary. The theoretical and empirical foundation of DNPV has been presented in several publications in peer reviewed journals (e.g., Espinoza 2014; Silverio, 2014; Espinoza and Rojo, 2015). Researchers from academic institutions have applied the concepts to energy projects (Humpert, 2016) and have developed tools and techniques on reliability, surrogate modelling and calibration that are ideal to expand the DNPV concepts (e.g., Garbuno Inigo, 2106). Furthermore, while climate risk analytics are rapidly evolving (Swann and Miller, 2016), DNPV is inherently flexible, adaptive, and can seamlessly integrate physical risks into financial risk models. The practical applicability of the DNPV concept has been demonstrated by the team's work with a number of financial institutions.

Previous Performance

Geosyntec CAT has assembled a multidisciplinary team with an outstanding track record in delivering excellence and significant experience in the design aspects of infrastructure, risk identification and quantification, climate change expertise, and financial and economic analysis. Our blueprint encourages entrepreneurship to drive new ventures, innovation, solutions of value, and development of intellectual property. The company maintains an R&D budget to fund promising efforts, continually expanding internal, innovative concepts into successful commercial entities. An example of entrepreneurship is OptiRTC, a developed suite of computing services for monitoring and control of water resources systems and other advanced green infrastructure facilities that help clients make real time decisions. To advance the ideas in the marketplace OptiRTC, Inc. was subsequently created. Other examples of entrepreneurship is SiREM and Savron, providers of patented remediation products and technical support. Furthermore, the seeds of the proposed DNPV concept initiated in 2003 by a grant provided by the National Science Foundation under its Small Business Innovative Research program that funded the project: Environmental Risk Management and Quantification Using Real Options. Geosyntec CAT's partners also have a track record in founding and developing innovative concepts as demonstrated by Quantum Waste (an integral waste management services provider built on the principles of decentralized operations and social enterprising developed by ssA), the award winning Resilient Hospital Dashboard (developed by Four Twenty Seven), and the cutting edge software Cossan x to quantify, mitigate and manage risk and uncertainty in a variety of fields (developed by the University of Liverpool).

The Team

Team Purpose

Geosyntec provides specialized consulting and advisory services to private/public sector clients to address complex problems involving our environment, natural resources, and civil infrastructure. We set the standard in technical disciplines related to natural and manmade hazard mitigation, value creation, and resource management. As climate change is a technical issue that has social and financial impacts for several asset classes; addressing climate change aligns closely with our core values/services. We have assembled a multidisciplinary team of like minded professionals (Table 1) with complementary skills committed to helping decision makers/investors understand climate risk and facilitate capital flows to adaptation and mitigation investments. We consider it critical to offer an unbiased approach allowing diverse stakeholders to evaluate investments equally; therefore, the approach should be funded by a third party foundation. Our goal is transparent dissemination of solutions and access to capital by globally affected regions using a standardized, easy to replicate investment platform that prices physical risks consistently.

Team Structure

A multidisciplinary team from diverse organizations has been assembled to successfully implement the proposed solution. The team will be organized (Figure 1) to cover specific areas of the proposed plan with responsibilities and lines of communication clearly established. In brief, the plan is to develop a Virtual Market Square (VMS) online platform for access to projects and funds, with the VMS powered by the DNPV approach. As important as the plan's implementation is the dissemination of proposed ideas and solutions in a rapid and readily reproducible manner. With this in mind, a blend of industry and academic experience was assembled. Team members' roles (i.e., VMS platform development, structuring typical guarantees, identification of local partners, facilitating/disseminating the VMS platform and the DNPV methodology, and performance monitoring) are specified in Figure 2, while a brief description of team members' expected contribution is presented in Table 1. In addition, to increase the platform's exposure and likelihood of adoption of the DNPV powered approach, a board is assembled, which includes six professionals from diverse investor classes (pension funds, multilateral agencies, and private equity). Board members will guide the team, providing direction on the proposed solution and relating their own experiences with existing systems and methodologies.