Reports from insurance industry body ClimateWise aim to provide guidance to help better manage climate risk to homes, mortgages, and assets, as fresh evidence emerges on scale of climate threat
Those alarm bells keep ringing, and they are increasing in frequency and volume.
2018 had barely begun before climate change provided a major corporate casualty in the form of Pacific Gas and Electric Corporation (PG&E), the Californian energy supplier which filed for bankruptcy after devastating wildfires in the state late last year took their toll to the tune of $30bn in potential liabilities.
Just days later, the World Economic Forum published its annual global risk assessment, which saw threats such as extreme weather, natural disasters, and the failure of climate mitigation and adaptation measures dominate four of the spots in the top five list.
And yesterday, international aid organisation CARE launched a new report highlighting the 10 most underreported humanitarian crises of 2018, which concluded that climate change is already playing a major, increasing, and often exacerbating role in devastating natural disaster events around the world, from Madagascar and Ethiopia, to the Philippines and Haiti.
"This adds to the growing body of scientific evidence that the global climate crisis undermines sustainable development and causes human suffering," the CARE report starkly states.
Meanwhile, the biodiversity that underpins our food system is disappearing, putting future food security under "severe threat", according to 'first-ever report of its kind' today by the UN's Food and Agriculture Organisation. Changes in land and water use and management, followed by pollution, overexploitation and overharvesting, climate change, and population growth and urbanisation are the key culprits, it states, and it is not difficult to see how a collapsing food system could have monumental ramifications for the global economy.
And these are just physical threats. They do not take account of complex interplay of reputational, legislative, and transition risks that will result as trillions of dollars are invested in new clean technology innovations and industries that can transform the economy and drive decarbonisation. Yet just this week, the dangers companies face from the rapid technological shifts were also writ large by Honda's decision to close its Swindon car plant, citing the need to adapt to the wider global shift towards electric vehicles.
Clearly the risks are mounting, and against this backdrop of widespread climate warnings and major companies suffering the consequences of failing to heed them, you would expect businesses to be poring through risk data with a fine toothcomb in order to develop resilient, future-facing, long-term strategies.
Many certainly are - a CDP report earlier this week found 80 per cent of European companies now see business risks relating to climate change. Yet it also showed that far fewer - less than half - are actually offering monetary incentives to their executives or boards linked to climate strategies, and only 53 per cent of firms have a target to reduce their total emissions.
While climate risk is now increasingly on the radar of businesses and investors, turning this understanding into tangible, practical actions to mitigate those risks is evidently proving more of a challenge.
Dr Bronwyn Claire, senior programme manager for the ClimateWise initiative at the Cambridge Institute for Sustainability Leadership (CISL), argues businesses, investors, and lenders need more support, tools, and guidance to help them better manage climate risk to homes, mortgages, and assets.
"Definitely in the last 12 months we've seen a clearer link between the transition to a low carbon economy and the physical risks of climate change impacting on companies' financial situations," Claire tells BusinessGreen. "Companies are beginning to take it on board, but to be fully integrated into all aspects of business decisions up to board level and strategy - as a Bank of England paper explained last year - that strategic level of engagement is still to come, although I definitely think there's progress."
To help push action to the next level, ClimateWise - a global network of 27 leading insurers including industry giants such as AXA, Allianz and Swiss Re - has today published not one, but two reports aimed at helping investors, lenders, and mortgage portfolio holders better identify, report, and adapt to the climate risks they may be facing.
"We are seeing an increase in demand for more practical and tangible ways to integrate climate change into business risk management processes," Claire, who co-authored both reports, tells BusinessGreen. "So people are recognising climate change is an important issue, they want to take it on board in their business decisions, but how do you actually do that, what modelling do you use, and how do you actually integrate it?"
The first report - which is aimed more at investors and insurers involved in infrastructure, as well as residential and commercial properties - covers physical risks posed by climate change. It contains some startling findings.
For example, it estimates that under business-as-usual levels of global greenhouse gas emissions, which could push average warming to 4C above pre-industrial levels by the end of the century, the average annual losses caused by floods to UK mortgages could surge 130 per cent, more than double the 61 per cent increase estimated under a 2C scenario. Investment portfolio losses in the UK, meanwhile, could rise by 40 per cent if 2C is reached by 2100, or 70 per cent under 4C of warming, it adds.
Of course, not all investors will be equally exposed, the report points out, with significant differences depending on factors such as geographical location of physical assets, for example. Nevertheless, while insurance will inevitably play an increasingly important role in managing the impact of climate change, the increasing risk could in more severe cases make premiums unaffordable, it explains. Indeed, total economic losses from natural disasters have averaged $180bn annually in the last decade, according to Swiss Re.
It is easy to see why some in the insurance industry talk of climate change posing an 'existential threat' to the sector. It is hard to see how losses at the level projected under some of the worst case scenarios can be sustained.
As such, the report argues that adapting properties to the threat of climate impacts should play a significant role in tackling growing risks, estimating such moves could potentially offset 65 per cent of the expected increase in losses. Moreover, adaptation measures are even more effective in combination with global efforts to reduce emissions, said David Rochester, head of underwriting at ClimateWise member Lloyds Banking Group.
"The key observation of this report is that we need to focus on both the mitigation of climate change, as well as adaptation to its effects, and that if we do both, we can maintain affordable insurance," he said.
The second report, meanwhile, focuses on managing the transitional risks of the move towards a low carbon economy, which it states are likely to increase significantly by 2030. It explores how to quantify policy changes, reputational impacts, technological innovations, and shifts in consumer preferences, identifying areas of both risk and opportunity for investors.
It includes a framework developed by ClimateWise that, aligned with the guidelines set out by the Taskforce on Climate-related Financial Disclosures (TCFD), is designed to guide investors through assessing how different asset types are exposed to transition risks and opportunities, and then help them incorporate transitional impacts into their financial models.
Taken together, the reports and their practical guidance highlight the value of enabling financial institutions to embed environmental scenario analysis into routine decision making, which is the next step businesses are under increasing pressure to take as part fo their climate governance efforts. Indeed, in the UK alone, the Financial Reporting Council is setting tougher standards for investors on environmental, social and governance (ESG) issues, the climate risk obligations on pensions trustees are being strengthened, and the Prudential Regulation Authority is recommending companies have at least one senior executive responsible for reporting to the board on climate risk. At the same time, calls for the TCFD reporting guidelines to be made mandatory are only set to grow.
In view of these wider pressures, companies and investors which move swiftly towards fully integrating climate risk across their decisions making structures could find reap significant benefits, Claire argues.
"You're seeing some firms which want to be first movers and take that competitive advantage, and there's others who really more see themselves as part of the pack, but are conscious that the pack is moving," she says. "What an average firm doing in response to climate change has moved, so everyone's ambition is getting bigger."
In the face of both warnings and opportunity, businesses, investors, and lenders are beginning to recognise tangible actions need to be taken to guard against climate and transitional risk, it seems - and, as the latest litany of scientific warnings proves, there isn't much time to lose.
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