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11 July 2019
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In our latest climate change liability risk report 'the coming wave of litigation', we explore the significant risks that climate change poses to businesses.
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In this section, we look at the significant risks that climate change poses to businesses. Firstly the physical, exploring acute events which impact the economy, such as loss of life, damage to infrastructure, disruption to water supply and transportation. We also look at how chronic climate changes are causing long-term risks to the reliability of supply chains and a rise in operating costs. This section then explores the transition risks which are likely to occur as the economy moves towards a low-carbon future.
Climate change poses significant physical risks to business. From reliability of supply chains, through to greater need for cooling and refrigeration, to increased likelihood of extreme weather events, companies need to be aware of the key physical risks to their business and to the economy generally.
Acute events can cause loss of life, infrastructure damages, water disruptions and effects on transportation, all disrupting economic activity. Chronic climate changes can cause long-term risks to the reliability of supply chains and increase operating costs.
A Schroders study in August 2018 found that properly accounting for physical risks to corporate assets could shave 2-3% off the total market value of over 11,000 globally listed companies.
Agriculture is already deeply affected by climate change. Shifting seasons, heatwaves and cold snaps are modifying the quantity and quality of crops. Changes in soil drainage caused by drought, flooding or diversion of water courses may bring about soil erosion and reduction in crop diversity. Traditional crops may increasingly become unsustainable in parts of the world.
Because the need for water cooling, many power plants are located near shorelines, making them more vulnerable to extreme coastal weather and sea-level rise. Electricity production at nuclear sites can be halted because of high temperatures and drought conditions also expose utilities to fire risk.
The aviation industry stands to be affected by changes in temperature, precipitation, storm patterns, sea level and wind patterns. The aviation sector has committed to carbon-neutral growth from 2020.
Flooding and excessive heat can impact the safety and operation of construction sites, as well as the durability and performance of building materials. The cost of insurance premiums may be affected to. Architects, engineers and project managers are increasingly considering sustainability in the design and construction phase of projects and reconsidering the viability of building building sites in light of increasing risks of sea level rises, flooding or desertification.
Rises in sea levels, storm surges and high winds can imperil ports, particularly in less sheltered areas, as well as ports with crane operations, while high temperatures can jeopardise river shipping. Calls for the shipping industry to reduce GHC emissions pose challenges and increase costs as well as presenting opportunities for the development and exploitation of new technologies.
Extreme weather can impact any industry's supply chains/ Global insurer Allianz has warned that disruption to supply chains as a result of climate change has already led to an increase in business interruption insurance claims.
Banks increasingly recognise climate change as a mainstream financial risk and consider environmental and social risks in assessing risk for credit facilities and capital market transactions.
Climate change effects may lead to higher regulatory burdens around tailings dams and other infrastructure as these may become vulnerable to seepage, increasing the possibility of pollution, environmental harm and resulting claims.
All of the above will impact insurance and insurability in the future, with it already being keenly felt. Weather-related losses in the insurance sector have been increasing from an average of around US$50bn per annum in the 1980s to around US$200bn per annum in the last decade. Insurers have warned that the world could become uninsurable if climate change continues unabated.
Transition risks are the indirect financial risks that will occur as the economy moves away from fossil fuels towards a low-carbon future.
Transition risks will arise as governments support and subsidise low-carbon industries and regulate and tax high-carbon ones. At the same time, improved technologies are leading to decreased costs of renewables, improved battery storage, better energy efficiency, and carbon capture and storage technologies.
A recent study indicates that more new power capacity is now generated from renewable energy than from burning fossil fuels. McKinsey predicts that energy demand could plateau around 2030 and demand for fossil fuels will begin to decline worldwide due to the increasing share of services as part of GDP.
The transition must be managed carefully: too abrupt a transition could destabilise markets- hitting hardest those businesses and investments which are most exposed and least prepared. In addition, there is growing academic discussion around a 'just transition', taking into account the need of citizens. The major policy shift to limit global warming will need to balance the needs of many who taken to the streets in the last years.
Stranded assets are assets that are impacted by unanticipated downward revaluations. Increased physical risks and chronic climate changes could also render operating costs prohibitive, potentially stranding entire industries or regions. Investments being made now could be creating potential future stranded assets and so this issue needs to be an important consideration in any investment decision process.
To meet the Paris Agreement targets, supply-side investments will need to fall in fossil fuels and rise in renewables. Demand-side efficiency investment in buildings, industry and transport will need to grow.
Shifts in consumer demand can also pose a transition risk. As the risks of climate change are socialised and mass environmental activism becomes increasingly prolific in news media, more citizens are considering moving toward a 'circular economy'; arguing for more ethical and sustainable consumption practices, boycotting plastic packaging and advocating 'zero waste' societies.
Companies could face reputational risks if their products are perceived to be harmful to the environment.
11 July 2019
11 July 2019