WEATHER BOMB: WHAT CLIMATE CHANGE, INSURANCE AND INVESTMENT HAVE IN COMMON
What climate change, insurance and investment have in common
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.”