Climate risk? Stormy 'whether'

The evidence is now overwhelming. Speaking at last September’s climate change
conference in Montreal, Thomas Loster, chief executive of the Munich Re
Foundation and a member of the Finance Initiative of the United Nations
Environment Programme (UNEP), referred to estimated record weather-related
economic losses in 2005 as totalling $200bn (£115bn). This exceeded the previous
worst year on record, 2004, by 37%. “There is a powerful indication that we are
moving from predictions of the likely impacts of climate change to proof that it
is already fully underway,” says Loster.

The Association of British Insurers’ June 2004 report, A Changing Climate for
Insurance said: “Weather risks are increasing by 2% to 4% per year on the
household and property accounts due to changing weather.” The report went on to
refer to the effects of climate on other general insurance lines and on the
health of individual citizens.

Counting the cost

The problem for business is focusing how climate change may impact the
day-to-day affairs of the enterprise. The author of the ABI report, Dr Andrew
Dlugolecki, a research fellow at the Climate Research Unit at the University of
East Anglia and consultant adviser to the UN’s Environment Programme, points out
several specific considerations.

The availability, cost and term of certain types of insurance cover may
become a concern, especially property insurance and business interruption cover
in areas with exposure to flooding. The costs of energy may rise, due to
interruptions to the supply of oil and the cost of water may increase, for
example, in the UK, where England may experience water shortages and especially
in areas of southern Europe.

The effects on various geographies, in which a company may have activities,
need to be examined. But the greatest risk, which may affect a variety of
business types, is that to brand value and credibility among consumers and other
stakeholders.

The Carbon Trust’s report, Brand value at risk from climate change, analysed
six business sectors: airlines, food and beverages, oil and gas, retail, banking
and telecommunication and concluded that climate change would become a
mainstream consumer issue, with reputational implications for companies in many
sectors if they failed to address the issue appropriately. In some sectors, the
lead time for action to be taken could be several years, posing a risk to
companies in the meantime.

But reputational risk is not only a consumer-related matter. Increasing
activity by groups such as the Carbon Disclosure Project, through which
institutional investors question major companies on environmental issues, is
likely to increase.

Credible actions

Dr Dlugolecki notes that the credibility issues do offer opportunities as
well as threats. Companies that are seen to understand and take action on
climate change will gain an advantage. And rather as marketeers for organic food
have turned labelling and consumer information into a selling strategy, so
businesses that demonstrate their climate change appreciation credentials will
gain a more willing audience.

In addition, Cary Depel, deputy chairman of the London-based Institute of
Risk Management, feels that FDs have an important role to play in this. “There
is a lot of crossover between risk management and finance. If, between them,
they can generate as hard data as possible about climate change risk, this can
enable them to build powerful predictive models. This can allow people within
the business to do scenario planning with far greater ability to handle the
situation when, or if, a peril impacts the business.”

What is clear is that doing nothing about climate change is a business risk
itself. The attitude displayed by a US financial services firm, which, when
questioned on what it was doing about climate change, replied: “All we do is
provide mortgages,” is simply not acceptable. Instead, businesses will need to
examine the risks posed to their business and demonstrate they’ve looked at the
issue.

A climate risk assessment report, commissioned from a credible third party,
will enable a business to say: “We’ve examined the issues, these are the
potential impacts on our business and we will continue to monitor the issues
going forward.”

Businesses may not be able to predict the consequences of global climate
change, but they can make an honest attempt to protect themselves from risks and
be in a position to do something about it.