What cli­mate change, in­sur­ance and in­vest­ment have in com­mon

NZ Business - - CONTENTS -

Cli­mate-re­lated fi­nan­cial and busi­ness risks are no longer fu­ture con­cerns. The tran­si­tion to a low car­bon econ­omy is un­der­way and hap­pen­ing fast and busi­ness lead­ers need to be treat­ing cli­mate change like any other haz­ard. By An­nie Gray.

Cli­mate-re­lated fi­nan­cial and busi­ness risks are no longer fu­ture con­cerns. The tran­si­tion to a low car­bon econ­omy is un­der­way and hap­pen­ing fast and it seems busi­ness lead­ers need to be treat­ing cli­mate change like any other haz­ard. By An­nie Gray.

The north­ern hemi­sphere sum­mer of wild­fires, ex­treme heat and flash flood­ing has been de­scribed by at least some in­ter­na­tional com­men­ta­tors as the face of cli­mate change play­ing out in real time.

Aus­tralian farm­ers are deal­ing with a crip­pling drought and at home we’ve also been del­uged (lit­er­ally) as heavy rain, king tides and vi­o­lent storms lashed parts of the coun­try cre­at­ing flood­ing, slips and power out­ages.

Asked about the myr­iad of se­vere weather events of late, Bryce Davies, the gen­eral man­ager of cor­po­rate re­la­tions at IAG, points to one cli­mate change sci­en­tist who says the cli­mate is con­stantly chang­ing and hu­mans have been adapt­ing and deal­ing with it for decades.

“There is noth­ing new in a chang­ing cli­mate but what is new is the pace and scale of cli­mate change is be­com­ing greater. It’s hap­pen­ing and it is se­ri­ous.”

2017 was the most ex­pen­sive year on record for se­vere weather events in New Zealand with $243 mil­lion in in­sured losses, ac­cord­ing to the In­sur­ance Coun­cil of New Zealand.

By the end of Au­gust this year the to­tal was al­ready at $218 mil­lion across more than 27,000 claims. As the coun­cil’s CEO Tim Grafton put it: “Th­ese events are fre­quent re­minders of the im­pacts cli­mate change are hav­ing on our coun­try…”

And in­sur­ers are at the coal­face of cli­mate change be­cause as the fre­quency and sever­ity of th­ese events in­creases, so do the pay­outs the in­sur­ance in­dus­try needs to make.

Cli­mate change is also see­ing more risk-based in­sur­ance sur­face. Some in­sur­ers have al­ready stated their pre­mi­ums would take greater ac­count of risks with cus­tomers in ar­eas at higher risk of nat­u­ral haz­ards, such as earthquake, flood and land­slip, see­ing in­creases in their pre­mi­ums.

But, Grafton says, while risk-based in­sur­ance is here, and in­creas­ingly so, in the cli­mate change con­text it’s the fi­nan­cial sec­tor that will have a ma­jor in­flu­ence on how the world re­sponds to cli­mate change across ev­ery busi­ness sec­tor. This is be­cause of its in­creased ex­po­sure to risk as coun­tries tran­si­tion to a low car­bon en­vi­ron­ment.

In­sur­ers glob­ally are mas­sive in­vestors. The Paris agree­ment on Cli­mate Change means a re­duc­tion in green­house gas emis­sions and that of­fers a clear tra­jec­tory, says Grafton. In­vest­ing in high car­bon in­dus­tries will not be a very good in­vest­ment for th­ese global in­vestors.

As a re­sult, in­vestors are mov­ing to re­duce their ex­po­sure to high car­bon emit­ters and look for op­por­tu­ni­ties in low car­bon eq­ui­ties.

Grafton says this is also linked to var­i­ous in­ter­na­tional ini­tia­tives that have started to shift the dial of cli­mate risk ex­po­sure that com­pa­nies have.

He points to the G20’s Fi­nan­cial Sta­bil­ity Board’s Task­force on Cli­mate-Re­lated Fi­nan­cial Dis­clo­sure (TCFD) which has de­vel­oped a vol­un­tary frame­work by which com­pa­nies can iden­tify their risks and op­por­tu­ni­ties with re­spect to cli­mate change. Reuters re­ported last year that this was draw­ing sup­port from more than 100 com­pa­nies with US$11 tril­lion of as­sets and that it came from con­cerns in the fi­nan­cial com­mu­nity that as­sets are be­ing mis­priced be­cause the full ex­tent of cli­mate risk is not be­ing fac­tored in.

Grafton also pointed to the United Na­tion’s En­vi­ron­men­tal Pro­gramme where large com­pa­nies glob­ally are work­ing to make a dif­fer­ence on a myr­iad of ar­eas. The UNEP has de­vel­oped a Prin­ci­ples of Sus­tain­able In­sur­ance and a Prin­ci­ples of Re­spon­si­ble In­vest­ment which have a strong fo­cus on sus­tain­abil­ity of fi­nan­cial un­der­writ­ing and in­vest­ment around en­vi­ron­men­tal, so­ci­etal and gover­nance prin­ci­ples. In­vestors are tak­ing a broader, more holis­tic view of what’s go­ing on.

In ad­di­tion reg­u­la­tory bodies are start­ing to point to­wards cli­mate change as a risk for any busi­ness. Grafton cited a speech by Ge­off Sum­mer­hayes, a board mem­ber of the Aus­tralian Pru­den­tial Reg­u­la­tion Au­thor­ity (APRA). He said that cli­matere­lated fi­nan­cial risks were no longer fu­ture con­cerns but were “fore­see­able, ma­te­rial and ac­tion­able now”.

In his speech pub­lished on APRA’s web­site Sum­mer­hayes also noted that a mem­ber of the EU’s High Level Ex­pert Group on Sus­tain­able Fi­nance ar­gued busi­nesses should treat cli­mate risk like any other haz­ard.

“That po­si­tion is en­tirely con­sis­tent with the thrust of APRA’s mes­sage to reg­u­lated en­ti­ties … think about this is­sue and weigh up how to re­spond. Put the ap­pro­pri­ate risk man­age­ment pro­cesses in place, cal­cu­late your ex­po­sure, as­sess your risk ap­petite, and make sound busi­ness de­ci­sions that limit your vul­ner­a­bil­ity and cap­i­talise on op­por­tu­ni­ties.”

Sum­mer­hayes was very cer­tain that the tran­si­tion to the low car­bon econ­omy is in mo­tion and is hap­pen­ing fast. “The weight of money, pushed by com­mer­cial imperatives such as in­vest­ment, in­no­va­tion and rep­u­ta­tional fac­tors, is in­creas­ingly driv­ing that shift, rather than sci­en­tists or pol­i­cy­mak­ers,” the speech notes say.

Grafton says the in­evitabil­ity of the tran­si­tion to a low car­bon en­vi­ron­ment means large fi­nan­cial in­vestors don’t want to be caught out and are mov­ing to lower in­vest­ment in eq­ui­ties and as­sets that have a high car­bon ex­po­sure.

The UN frame­work is be­ing picked up around the world and he says it will start to be­come a dif­fer­en­tia­tor be­tween com­pa­nies that have ap­plied their minds to cli­mate risk and the ex­po­sure they have and are chang­ing their strat­egy. This will be a sig­nal to in­vestors.

Grafton ex­plains that in­sur­ers have very sig­nif­i­cant global in­vest­ments, and be­cause they have ex­po­sure on both sides of their bal­ance sheets due to cli­mate change, as un­der­writ­ers and in­vestors, this means that the onus is strong to man­age the tran­si­tion to a low car­bon econ­omy.

He says it is no sur­prise the first movers are in­sur­ers, they need to en­sure they don’t end up with in­vest­ment in “stranded as­sets”.

Grafton says the key is trans­parency and dis­clo­sure of cli­mate change risk and op­por­tu­ni­ties to in­vestors.

And for com­pa­nies to look at pro­vid­ing dis­clo­sures on their risks and the strat­egy to ad­dress them, this sig­nals that th­ese are at­trac­tive com­pa­nies for cap­i­tal in­vest­ment.

On the flip side there is plenty of in­sur­ance cap­i­tal to meet the cli­mate change risks – in­sur­ance is us­ing more so­phis­ti­cated tools to be able to as­sess the risks, more pre­dic­tive mod­el­ling and a more gran­u­lar ap­proach around risks they are un­der­writ­ing so their un­der­writ­ing has be­come a lot smarter.

So will there come a time when peo­ple can’t get in­sur­ance in cer­tain ero­sion or flood prone ar­eas? Grafton says it will be “chal­leng­ing”.

In New Zealand the busi­ness com­mu­nity is start­ing to step up to the plate. Re­cently 60 CEOs from some of New Zealand’s lead­ing com­pa­nies have signed up to the Coali­tion for Cli­mate Change to re­port on their emis­sions and en­cour­age sup­pli­ers to tran­si­tion to a lower car­bon en­vi­ron­ment. The Govern­ment also has it Car­bon Zero Bill be­fore Par­lia­ment with multi-party sup­port and plans to es­tab­lish a Cli­mate Change Com­mis­sion.

Grafton says this will pro­duce a flow of work, iden­ti­fy­ing, mit­i­gat­ing and adapt­ing around cli­mate change and that will con­tinue with suc­ces­sive govern­ments.

IAG’s Bryce Davies says there is quite a broad spec­trum in terms of busi­ness re­sponse around cli­mate change – some are very ad­vanced and oth­ers still at the be­gin­ning.

He also points to the Cli­mate Lead­ers Coali­tion as an ex­am­ple of the in­creas­ing se­ri­ous­ness with which busi­ness is tak­ing the is­sues. He says that the com­mit­ment made by mem­bers of the CLC to mea­sure and re­duce their emis­sions is a unique and ma­jor step in the right di­rec­tion.

Davies says busi­ness lead­ers need to un­der­stand their own foot­print and have a plan to re­duce it. Many busi­nesses are al­ready do­ing so, in­clud­ing IAG which has mea­sured its foot­print since 2005 and been car­bon neu­tral since 2012.

He also adds that while many busi­nesses are think­ing about their im­pacts on the cli­mate, not enough are think­ing about the im­pact the cli­mate will have on them.

“Even if we stopped emit­ting now the im­pacts will still oc­cur. Even now parts of New Zealand reg­u­larly suf­fer from flood­ing, ero­sion, and drought. Whether it is too much, or too lit­tle, wa­ter, high winds or drought or fires, the im­pacts of cli­mate change will af­fect busi­ness."

Davies points to a study by the Par­lia­men­tary Com­mis­sion for the En­vi­ron­ment look­ing at sea level rises which shows what hap­pens if the level rises by 30cm by mid-cen­tury and the ar­eas that will be in­un­dated. He says there

are big de­ci­sions to be made in th­ese ar­eas.

ICNZ’s Grafton noted in a press re­lease last year that if there were to be a 30cm sea level rise be­tween now and 2065, a rel­a­tively con­ser­va­tive pos­si­bil­ity, “what are to­day con­sid­ered ex­treme, one-in-100year high wa­ter lev­els will oc­cur an­nu­ally in both Welling­ton and Christchurch. There are 32,000 homes within 1.5m of the cur­rent mean high tide level.”

Davies says that busi­nesses need to un­der­stand the phys­i­cal risks they face be­cause of cli­mate change and to have a plan. What do you do if your busi­ness faces more flood­ing, in­un­da­tion, stronger winds, drought? How are th­ese go­ing to im­pact on your busi­ness and how are you go­ing to adapt to that?

He sees a range of im­pacts on busi­ness which lead­ers need to think about.

Lead­ers need to un­der­stand what in­vest­ment they will need in new plant and new tech­nol­ogy to cope with cli­mate change – both to re­duce their emis­sions and to suc­cess­fully adapt.

Busi­ness look­ing at a long-term in­vest­ments in plant and in­fra­struc­ture must think about if, and how, they might work in a dif­fer­ent cli­mate. What will this mean for the life of the as­set and its main­te­nance pro­gramme?

Lead­ers also need to un­der­stand the im­pact on day-to-day op­er­at­ing. What will it do to their op­er­at­ing costs due to changes to raw ma­te­rial or the cost of the ETS? What does it mean from a busi­ness con­ti­nu­ity point of view? How might it dis­rupt your sup­ply chain or staff or cus­tomers?

He also says lead­ers need to think about what cli­mate change might do to their mar­kets. Will your cus­tomers still want your prod­ucts and ser­vices? In­creas­ingly con­sumers al­ready want to buy prod­ucts from a sus­tain­able or­gan­i­sa­tion. Will there be new op­por­tu­ni­ties?

“What your cus­tomers think of you, is re­ally im­por­tant. So it’s about con­sid­er­ing the im­pacts on them and the op­por­tu­ni­ties that cli­mate change will bring.”

He also made the point around cap­i­tal and in­vestor sen­ti­ment. This is about the abil­ity to ac­cess cap­i­tal at an af­ford­able price. He too pointed to the UN-led Prin­ci­ples for Re­spon­si­ble In­vest­ment and the TCFD – the ve­hi­cles al­low­ing in­vestors to make in­formed de­ci­sions on the fi­nan­cial im­pact of cli­mate risk ap­pro­pri­ately.

Huge in­vestors such as the US-based Black­rock and Aviva, a mas­sive UK in­sur­ance com­pany, are tak­ing a very firm stance on what they in­vest in and work­ing with com­pa­nies to help them re­duce their car­bon foot­print.

He says it is im­por­tant to recog­nise that do­ing the right thing helps to se­cure and re­tain the cap­i­tal to run your busi­ness.

So, could com­pa­nies not in­volved with some type of adap­tion or re­duc­tion be pe­nalised? Davies says that is emerg­ing. He says more so­phis­ti­cated in­vestors are think­ing about it but are also think­ing about how to sup­port in­vest­ment in a sec­tor or in­dus­try and help them be­come more sus­tain­able. If you are a listed en­tity you cer­tainly need to be think­ing about cli­mate change and how you are re­spond­ing.

This ac­cess to cap­i­tal is not just listed en­ti­ties. Davies spec­u­lates that over time banks will in­creas­ingly take a view around th­ese sorts of is­sues and the im­pact of cli­mate change on a busi­ness in their lend­ing de­ci­sions.

His fi­nal point was the peo­ple need to think about their broader rep­u­ta­tion. How are they seen by all stake­hold­ers? Are you con­tribut­ing to the so­lu­tion? So what about in­sur­ance? Davies says that IAG knows that cli­mate change will im­pact how they in­sure high­risk lo­ca­tions.

“We re­flect the risk in our price and terms – there will be pock­ets of New Zealand where, in the longer term, the af­ford­abil­ity and avail­abil­ity of in­sur­ance may be­come less cer­tain be­cause of in­crease flood risk or in­un­da­tion from the sea.”

Davies says IAG has been talk­ing to Govern­ment about how they think things might oc­cur.

“The ques­tion to be asked is how we help th­ese com­mu­ni­ties so that they keep the ben­e­fits and the safety net of in­sur­ance – and if we can’t, then how do we help them to move to a place of safety.”

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