Pressure is mounting for organisations across all industries to better understand, report on and mitigate the impact that climate change is having on their businesses
The Reserve Bank of New Zealand and Bank of England recently stated that it believes climate disclosures will soon become mandatory, and there are signals that international regulators are moving down the path to compulsion.
Alex Pui, Head of Nat Cat and Sustainability APAC, at Swiss Re Corporate Solutions explains: “The UK and New Zealand have already gone mandatory and I think others will follow suit. It’s a wide spectrum, but those that are not already on the bandwagon are catching up and with the recent election results I think you will see the US start to really ramp up in that direction as well.
“It’s going to start first in the financial industry, because regulators tend to be concerned about the security of funding or the stability of the broader financial system, and then branch out next towards those industries that are most invested in the transition risk aspect with a strong public interest component, for instance energy companies.”
The change is now
Pui believes that the broader push for mandatory disclosure will accelerate rapidly over the next three to five years. For risk managers, this means it is imperative to understand the risks your business already faces, how those threats might be impacted by climate change, and what steps you can take to mitigate against them.
This means that organisations must stop thinking about climate change as something that might happen in future, and instead appreciate that it’s something that is already impacting companies at present – with more serious impacts predicted for the future.
Pui said: “Everyone suffers from myopia to a certain extent and while the upfront costs of dealing with climate change may seem very significant, however, it does pay off in the long run. It’s also important to frame it such that companies are not tackling climate change just because they need to satisfy the regulator - that’s the wrong approach.
“Companies should recognise the value that it brings because looking at climate change means effectively looking at your current climate catastrophe risk profile, projecting this view forwards in time and identifying how to improve business resilience. The catastrophe modelling view is often seen as a ‘short term view’ due to the annual recurrence nature of insurance contracts. However, it is important to realize that this ‘short-term view’ helps you to achieve your long-term goals, rather than being mutually exclusive.”
Working in collaboration
Generally speaking, climate change poses three key business risks: physical risks arising from extreme weather events, transition risks, as companies make the shift to a zero-carbon economy and potentially liability risks if firms are held accountable for not adhering to minimum standards of a ‘duty of climate care’.
Swiss Re Corporate Solutions is already working with several clients to help them on the journey to cataloguing their exposures and seeing how they might shift due to climate change.
Pui explains: “For high level portfolio screening, we use climate risk scores, which essentially estimates the trajectory of physical climate risk within their portfolio with time under different Representative Concentration Pathways.”
“Based on that we identify hotspots within the portfolio and do more of a deep dive if required to identify more specific risk drivers such as sea level rise, storm surge, flood, or heat-related impacts. Then we work together with the client - in a collaborative manner because they know their businesses the best - and act as advisors on the most suitable ways to mitigate or transfer the risks.”
Apart from helping businesses identify and mitigate their risks, Swiss Re Corporate Solutions is also building out its solutions to help those organisations that are looking at energy transition, including looking at carbon taxes and the associated disruption they may bring for companies.
Finding new solutions
Oftentimes, helping businesses cope with natural catastrophes means helping them to navigate some of the more innovative risk transfer solutions, such as resilience bonds, parametric solutions and catastrophe bonds etc.
For instance, after the unprecedented 2019-2020 Australian bushfires, Swiss Re Corporate Solutions worked with a key energy provider to assess the evolution of bushfire risk in Victoria, physical mitigation methods and potential risk transfer solutions. This collaboration between insurers and risk managers will be key to ensure that the underlying risk is adequately priced, capacity is secure and affordability concerns are addressed as climate change increases the frequency and severity of weather-related events.
Pui concluded: “We see climate engagement with our clients as a natural progression of sharing our risk expertise that we apply in our day to day business. We are confident that this collaboration will lead to a win-win situation for both parties. For example, if climate change impacts pushes the underlying risk beyond the limits of insurability, the client loses insurance coverage and we lose access to the risk pool, which will not be in the interest of either party.