MANAGING EXPOSURE TO CLIMATE RISKS
TRACY: Real assets are becoming increasingly vulnerable to the physical impact of climate change, from extreme weather events to natural disasters. How are you managing exposure to these physical risks?
BOBBY: Extreme weather events, such as yearly tropical storms, and floods are something we are quite used to here in the Philippines. So as a real estate developer, climate-related physical risks are front and centre of our evaluations whenever we look at a new investment. When we do our due diligence, we typically assess for different geohazards such as liquefaction, fault lines and floods that used to occur every 50 to 100 years but are now happening more frequently. We have walked away from sites where we felt that the risks were not going to be manageable based on our projections.
Having said that, we are obviously a commercial business, so we ensure that for all of our estates, we seek to mitigate these physical risks, starting from the design stage.
For example, one of our resorts is located in El Nido, one of the seaside destinations in the Philippines, right by the water. So what we have done from a design standpoint is to place all developments 40 metres away from the high tide line, and elevate all our structures in anticipation of global warming and rising sea levels. We wanted to make sure that 50 or 75 years from now, the site will still be sustainable.
Another recent, significant impact of climate change is severe rainfalls in a short period of time which has the potential to cause significant flooding. So in many of our estates, we have integrated detention ponds and tanks to hold the water, to prevent our drainage systems from being overwhelmed, and to protect the surrounding communities.
As an example, underneath Burgos Circle in Bonifacio Global City is a detention tank, equivalent in size to eight Olympic-sized swimming pools, to store floodwater. During one of our worst floods in 2009-2010 caused by Typhoon Ondoy (Ketsana), Bonifacio was not affected because of these detention tanks which were able to hold the water and gradually release it into the drainage system.
In some of our other estates, we have rain gardens which function as detention ponds, and for most of our newer developments, we factor in and mitigate the physical risks associated with sudden and severe rainfall. As there are a lot of low-lying areas in the Philippines, we elevate our sites by one to two metres where necessary to reduce their exposure to flood risks.
Unfortunately, in the Philippines we are also accustomed to frequent natural disasters, but as an organization, we are really proud of our emergency response mechanisms. We have an emergency response team in each of our sites, a national crisis management team, and a 24/7 operations centre.
We monitor all our sites closely, and are able to mobilise resources whenever a natural disaster occurs in a particular area. Obviously, you can’t possibly anticipate some of these events, so we maintain adequate insurance for all our sites to make sure that our financial exposure is minimised.
ERIC: For our energy projects, we bake into our costings the higher capital expenditures (CapEx) required to mitigate climate-related physical risks.
Philippines CapEx are typically higher than those for Vietnam or India, and at least 10% of that delta is attributable to the fact that we are just a natural disaster-prone area, so we need to build according to stringent construction standards. That adds costs, whether it’s to account for stronger foundations, or Class 1 wind turbines which have shorter blades and lower capacity, which in turn increases the levelised cost of electricity.
As an example, for our solar farms, we bought quite cheap land because it was a lahar-covered area following the Mount Pinatubo volcanic eruption from decades ago. Flood protection and flood control infrastructure were critical as the area was known for heavy rainfalls, so we invested in technical studies. Fortunately, the structures we built and locations we selected based on the study are doing well. So you just need to invest in understanding the environment better.
Insurance and emergency response, as Bobby mentioned, are a given. Ayala Land is best in class, while we are still building up our capabilities in this space, but we benefit from being part of the Ayala Group. We leverage the strengths, synergies and best practices of the group, and don’t have to reinvent the wheel.
Lastly, with our renewables business, we diversify our locations. Diversification is good on many fronts. The more diversified we are, not only across the Philippines but also around the region, the better we are able to mitigate resource and physical risks related to natural disasters and climate change. That’s why you have seen our aggressive expansion across different parts of the Asia-Pacific.