Managing Environmental Financial Risks through Modeling of Coupled Natural Human Systems

Dr. Gregory Characklis - Philip C. Singer Distinguished Professor, Dept. of Environmental Sciences & Engineering, Director of the Center on Financial Risk in Environmental Systems, University of North Carolina at Chapel Hill

Variable environmental systems, particularly those related to hydrology, often give rise to extreme events (e.g., droughts, floods) that impact the costs and revenues of organizations in both the public and private sectors. The financial instability that results can be very disruptive and therefore influence decision-making in a number of ways that can be both expensive and environmentally burdensome. Understanding the nature of the financial risks posed in terms of both their frequency and severity requires integrated modeling of the hydrologic and economic/financial systems involved. Once these risks have been quantified, financial strategies for managing risk can be developed, with these strategies often enhanced through the development of novel financial instruments. A general approach to characterizing coupled natural-human systems will be discussed, followed by a description of several ongoing studies funded via NSF’s Water Sustainability and Climate and Innovations at the Nexus of Food, Energy, Water Systems programs, among others. Examples will include evaluating strategies for managing the financial risk of drought for urban water utilities, electricity generators, agricultural producers and inland navigation. Results suggest that environmental financial risk can often be substantially reduced through the use of innovative financial instruments, and that this risk reduction has the potential to lead to lower environmental impact.