There is a significant deficit in both new infrastructure and maintenance spending for flood defences, adding to an already existing gap in adaptation investment. To address this issue, private finance is leveraging a neoliberal approach to establish a market-based solution for flood security.
Cash
Historically, flood defences have been managed through a combination of public and private entities. Until recently, private flood defences were primarily part of property portfolios due to legal requirements. Managing water flow on one’s land was mandated by law. However, with the trend in Britain toward privatizing essential infrastructure, flood defences are increasingly being viewed as financial assets.
Financial assets are those whose value is derived from a contractual claim to future revenue, such as stocks, securities, and bonds. To convert physical infrastructure into a financial asset, its future revenue streams need to be securitized or contractually packaged.
This transformation typically occurs through three methods: the government awards a company a contract to assume risk or operate a service (a public-private partnership); the government privatizes a service, often creating a monopoly in a specific region or industry; or a company issues bonds based on the asset’s performance, where debt repayment is directly linked to the asset’s cash flows.
Defences
The first two methods have been used by successive British governments to convert public services into private wealth, such as water and sewage systems. The third method is commonly applied to environmental challenges, involving mechanisms like carbon credits and catastrophe bonds. Eventually, these options are amalgamated into bonds and shares, which are then sold to investors like asset managers Blackrock or Macquarie. This is precisely what the newly established FloodAction Coalition aims to achieve in the UK.
âThe FloodAction Coalition, led by The Conduit, unites insurers, landowners, and investors to create a ÂŁ1 billion market for water resilience by 2028âtransforming nature-based solutions into scalable, investable infrastructure for a climate-resilient future.â FloodAction, primarily a coalition of insurance and finance companies and large institutional landowners such as the National Trust and The Crown Estate, does not plan to build any defences itself. Instead, it is developing a national investment market for “natural flood management.”
Monitoring
Natural flood management (NFM) involves using nature-based solutionsâsuch as restoring wetlands, planting trees, and constructing log damsâto slow, store, and filter water upstream to mitigate downstream flooding. The coalition will collaborate with landowners in river catchments and key agricultural areas to fund natural flood management projects. Five projects have already been identified as blueprints for future investment.
Additionally, 50 priority river catchments across the UK have been formally identified for funding. These catchments are viewed as “opportunity clusters,” where individual landowners can submit projects to the coalition for funding. The goal is to consolidate the individual projects within each cluster into a single, investable portfolio.
The coalition does not intend to buy or lease land or construct flood defences itself. Instead, it plans to establish a ÂŁ1 billion market that will accept bids from landowners and project managers, funding the installation, maintenance, and long-term monitoring of the defences.
Streams
The market will attract funds based on the potential for financial returns, generated from three primary sources. The first source is contracts with insurance companies, which would contribute to the fund to create flood defences, thereby reducing future flood damages and claims. Quantifying these avoided losses would allow insurance companies to lower capital requirements and reduce risk-weighted assets.
The second source of revenue comes from various government environmental schemes that provide income for farmers and landowners. The coalition would share these income streams with landowners, offering a consistent income like other infrastructure asset investments.
Calculus
The third and most significant source involves generating various ânatureâ credits, such as nutrient mitigation credits purchased by water utilities and property developers to offset pollution, and Biodiversity Net Gain (BNG) units sold to corporate developers, along with carbon credits. The coalition would consolidate these revenue streams over an opportunity cluster, underpin them with performance metrics like water storage volume and BNG units generated, and create saleable bonds and securities offering institutional investors predictable yields with ESG credentials.
The coalition is not the first attempt to classify environmental security as an asset in the UK. Various schemes have been attempted over the past decade, but the FloodAction Coalition is unique in its ambition to create a national market. Londonâs status as a global green finance hub suggests that if successful, this project could serve as a model for global climate adaptation markets.
In the UK, public flood defences must be justified as âeconomicalâ to be constructed, making physical security inherently linked to economic calculations.
Robust
This economic evaluation includes considering the number of people impacted, often measured through housing values. When deemed not economically viable, individuals face two choices: construct their own defences or relocate when no national fund is available for relocation.
With increasing impacts, insufficient funds, and governments adhering to fiscal austerity, exploring innovative private investment forms seems logical. This perspective is shared by both the current government and the Climate Change Committee regarding the future of flood defences.
NFM is increasingly recognized as a crucial aspect of a robust national flood defence strategy. Research by the Tyndall Centre suggests it could reduce future flood damage by up to ÂŁ120 million by 2050.
Viable
However, the same research indicates that NFM alone accounts for only a 9 to 13 percent reduction in river flood damages and must be combined with traditional flood defences to realize its full potential. NFM is insufficient for more extreme flood events and can take up to 15 years to develop fully.
Two major concerns persist. First, without increased funding for traditional defences, the coalitionâs schemes may have limited positive effects on flooding. As the public funding gap widens, private investments may prioritize profitable projects over those that are necessary but economically less viable.
Returns
Secondly, if successful, the coalitionâs approach shifts how flood defence investments are evaluated. It transitions from a cost-benefit analysisâmeasuring if a flood defence’s construction cost is justified by the damage it preventsâto a focus on private return on investment. Investment in natural flood defences will occur only if there is sufficient interest from insurance companies, adequate government funding, and enough income from nature-based credit schemes.
Finally, private flood defences often suffer from poor maintenance. As assets meant to deliver returns, there is a tendency to minimize maintenance costs and exaggerate impacts to maximize returns.
Survival
In the UK, insurance companies are withdrawing from offering flood and disaster coverage to high-risk households, a trend observed in other countries too. The lack of government funding is already endangering more individuals and properties. Transitioning from public to private flood financing could further worsen this critical situation.
Moving to a private flood defence market is not progress but a continuation of discredited neoliberal policies that have led to the deterioration of Britainâs infrastructure and wealth extraction. As climate impacts intensify, Britain needs more state investment, not increased private finance. Our survival should not serve as a new revenue stream for asset managers.
This Author
Dr Nicholas Beuret is a lecturer at the University of Essex researching the politics and political economy of climate change and the green transition. His book Or Something Worse: Why we need to disrupt the climate transition is out now with Verso.
