By Caroline Fouvet
Is climate change a risk or a business opportunity for investors? As insurers are facing a growing financial exposure due to increasing extreme weather events, the business sector appears mainly threatened by the consequences of a rapidly changing climate.
According to the Global Adaptation & Resilience Investment (GARI) Working Group, investors actually see both dimensions in climate change. In their recent report Bridging the Adaptation Gap, GARI members, who represent private stakeholders from pension funds, insurance companies, banks, investment managers to corporations and start-ups, point out that over 70% of investors are considering investments in climate resilience today and see the analysis of climate-induced risks as a very important issue.
But then, how can investors precisely assess the physical risks triggered by climate change and what are the necessary investments for them to make in that respect? The report, which compiles over 150 responses from business actors to a survey on climate adaptation and resilience, suggests several leads and ways to overcome the current risk assessment limitations.
To reduce the uncertainty of climate change impacts, a set of current approaches to risk analysis, including insurance risk ratings, corporate use data, portfolio screening tools, project scorecards, engineering due diligence and design analysis, was identified. Feedback on each strategy was provided, along with suggestions for improvement. Among the criteria for a set of metrics to be successful, ensuring a transparent methodology and a practical framework were overwhelmingly supported.
Addressing climate change risks also requires investments in adaptation and resilience, for which some examples are outlined in the report. GARI members highlight the difference between resilience as an investment feature, that is, making an infrastructure resilient to climate change, and resilience as a product, such as a resilience-driven investment like building a seawall. Smart grids, green buildings and protection from river erosion belong to the first category, while catastrophe risk modelling, disaster warning systems and climate bonds are part of the second.
As global temperatures continue to rise, it is probable that society will have to cope with the increased intensity and frequency of devastating meteorological phenomena. Bridging the financial adaptation gap, which could reach $280 to $500 billion per year by 2050 according to the United Nations Environment Programme should hence be a priority. Therefore, investors’ preparedness to face the financial repercussions and to adapt their strategies are key features of the global adaptation effort. What’s more, it appears that climate change entails substantial business opportunities for investment actors, and it is now up to them to tailor their portfolio accordingly.