Businesses across all sectors will be affected by climate change. Corporations, from Starbucks to Google, will be affected by climate impacts that can disrupt their supply chains and damage their physical infrastructure. However, comprehensive climate change adaptation assessments and strategies are infrequently considered as part of companies’ business plans. As suggested by Professor Michael Porter, the perception of “an inevitable struggle between ecology and the economy” leads some companies to be wary of environmental regulations, often viewing them as expensive procedures that lie outside of core business planning.
Professor Porter, however, disagrees and claims that there is a complementary relationship between environmental protection and business. He argues that companies that pay attention to environmental risks are likely to be more competitive. The ‘Porter hypothesis’, formulated in the 1990s, is still relevant today especially with the implementation of disclosure policies on climate change–related risks gaining traction.
In July 2015, France introduced mandatory climate disclosure requirements as part of its law on “energy transition for green growth”. Institutional investors must now report on how their investment policies integrate climate change considerations, and where applicable, climate risk management. This was followed the following year by legislation passed by the European Union’s parliament targeting pensions funds and requiring them to include climate change in their investment strategies. Climate disclosure requirements could help companies to be prepared for emerging climate risks and increase their resilience.
Furthermore, in 2017 the Financial Stability Board’s Task Force on Climate-related Financial Disclosures published its final recommendations to help companies disclose climate-related risks and opportunities. Following the release of these recommendations, a group of 16 leading banks is participating in a UNEP Finance Initiative project, co-lead by Acclimatise and Oliver Wyman, that is developing a methodology for the banks to help them strengthen their assessments and disclosure of climate-related risks and opportunities.
Although the businesses are becoming increasingly aware of climate risks to their operations, there remains plenty of room for progress. For example, even though the insurance sector is particularly vulnerable to climate-related risks, its business strategy does not shield it from the impact of climate change. A study shows that many assets are becoming uninsurable, leading to an estimated US$ 100 billion ‘protection gap’ – the difference between the costs of natural disasters and the amount insured.
Assessing the impact of climate change on investments and adapting business strategies accordingly can help businesses save money in the medium-long term. For that to happen, it is up to governments to implement disclosure requirements. For companies it is important to pre-empt such regulation, and take early action to reduce climate risks to both core operations and supply chains.
The European Bank for Reconstruction and Development (EBRD) and the Global Centre of Excellence on Climate Adaptation (GCECA) are hosting an event “Advancing TCFD guidance on physical climate risk and opportunities”, which will be held on 31 May at the EBRD’s headquarters in London. This event will build on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which crystallised a growing concern of investors and business leaders over the physical impacts of climate change on the economy and financial markets.
The TCFD’s final recommendations, released for the G20 summit in June 2017, recommended the inclusion of metrics on physical climate risk and opportunities into financial disclosures and called for further research and concrete guidance over what the appropriate metrics should be. Corporations and financial institutions need to agree on common metrics to ensure transparency and data comparability. Since then, the recommendations of the European Union’s High Level Expert Group on sustainable finance, released in January 2018, have also highlighted the need for a common taxonomy on climate change adaptation and metrics for physical climate risk and opportunity disclosures.
This event will be a forum for senior representatives from the financial and business community to discuss and identify the way forward for the development of metrics for disclosing physical climate risk and opportunities, as well as pointers for integrating physical climate risk considerations in scenario-based decision making by businesses and financial institutions.
The conference is sponsored by the EBRD and GCECA, and will feature the findings from expert working groups that include representatives from Allianz, APG,AON, Bank of England, Barclays, BlackRock, Bloomberg, BNP Paribas, Citi, DNB, Deutsche Asset Management, Lightsmith Group, Lloyds, Meridiam Infrastructure, Moody’s, OECD, S&P Global, Shell, Siemens, Standard Chartered, USS and Zurich AM, Acclimatise and 427 are providing the Secretariat function.
A detailed agenda will be circulated in due course. Please note that this is an invitation only event. More information can be found on EBRD’s website.
As member of the technical secretariat, Acclimatise is closely involved in the preparation of this event.
Acclimatise is also co-leading a United Nations Environment Programme – Finance Initiative (UNEP FI) project exploring climate-related risks and opportunities for financial institutions. The project has a Working Group of 16 leading international banks and will produce a harmonized methodology for banks that will help them strengthen their assessments and disclosure of climate-related risks and opportunities.
On Wednesday 31 January, the High-Level Expert Group (HLEG) on Sustainable Finance released its final recommendations to the European Commission. The recommendations will inform the Commission’s strategy on sustainable finance, and its wider efforts to create enabling conditions for the EU to meet its targets under the Paris Agreement and goals of the 2030 Agenda for Sustainable Development. The Commission understands the financial sector has a key role to play in meeting these targets and goals, as private capital could be mobilised to help reach the €180 billion of additional investments needed per year to meet emissions targets alone.
The recommendations (listed below) centre around a series of themes which together create a multi-dimensional roadmap aiming to accelerate the shift to sustainable finance. These include the imperative of synchronising changes in the financial system with action in the real economy, as well as the need for financial institutions to ask clients and beneficiaries about their sustainability preferences and ethical values. Another theme is the need to connect the supply of capital with place-based priorities via suitable local bank networks, fintech, local authorities, communities, and others to develop investable pipelines of green assets (such as property and infrastructure) in vulnerable regions. A final imperative is extending the time horizons of financial decision making.
The Group’s set of eight key recommendations, include:
Establish and maintain a common sustainability taxonomy at the EU level
Clarify investor duties to better embrace long-term horizon and sustainability preferences
Upgrade disclosure rules to make sustainability risks fully transparent, starting with climate change
Key elements of a retail strategy on sustainable finance: investment advice, ecolabel and socially responsible investment minimum standards
Develop and implement official European sustainability standards and labels, starting with green bonds
Establish ‘Sustainable Infrastructure Europe’
Governance and Leadership
Include sustainability in the supervisory mandate of the European Supervisory Authorities and extend the horizon of risk monitoring
These recommendations will certainly work to do more than mobilise private capital toward sustainable projects, products, and companies. They have the potential to shift how the financial services sector thinks about physical climate change risks, first and foremost by encouraging a longer time horizon than is typically considered. Furthermore, the recommendation on climate risk disclosure (recommendation 3) builds on the voluntary Task Force on Climate Related Disclosure (TCFD) recommendations, highlighting the momentum being gained by analysis and disclosure of climate risks in the finance sector. Unlike the TCFD recommendations, the HLEG recommendations target the financial sector specifically in their disclosure recommendation, stating they recommend “to upgrade Europe’s disclosure rules to make climate change risks and opportunities fully transparent. A transparent financial system is a prerequisite for sustainable finance. An interconnecting framework of effective sustainability disclosure covering financial products, financial assets, financial institutions and financial authorities is thus essential.”
Some actors in the sector are leading the way with their efforts to analyse and disclose their climate risks. Acclimatise are working with a group of 16 international banks along with UNEP FI, to devise a methodology which they themselves, as well as other banks, can use to make these important disclosures against the TCFD recommendations. Our company is also part of the technical secretariat supporting a deeper exploration of the metrics needed to carry out climate risk and opportunity disclosures, as part of a new Global Centre of Excellence on Climate Adaptation (GCECA) and European Bank for Reconstruction and Development (EBRD) initiative. The GCECA and the EBRD have convened a set of experts in a series of working groups which aim to progress toward developing physical climate risk metrics, as well as climate resilience opportunity metrics. Both of these efforts will result in publicly available outputs, which can be used by both corporates and financial institutions in their efforts to analyse and disclose climate risks and opportunities.
The HLEG’s new recommendations are just another clear signal for the financial sector that climate change risks can no longer be ignored and have to be considered in order to build a climate resilient economy.
Last year marked several groundbreaking and game-changing events for the financial sector and how it deals with climate change. It became obvious that physical and transitional climate change risks to financial portfolios can no longer be ignored. Now, the pressure on businesses is increasing to disclose those risks and climate-proof their portfolios.
Final recommendations of the Task Force on Climate-related Financial Disclosures (TCFD)
In June 2017, the TCFD, a task force set up by the Financial Stability Board in 2015, published its final recommendations to help companies disclose climate-related risks and opportunities. At the time of publication, over 100 businesses with a total market value of roughly $3.5 trillion and financial institutions responsible for assets worth about $25 trillion publicly committed to support the TCFD’s recommendations. In January 2018, the number of businesses pledging to regularly disclose their climate change risks as per the TCFD’s recommendations has risen to over 200; these firms together manage a combined $81.7 trillion.
The final recommendations are structured around four thematic areas that correspond to how companies operate, and the information investors need to make better informed decisions: governance, strategy, risk management, and metrics and targets.
Michael Bloomberg, Chair of the TCFD said: “Climate change presents global markets with risks and opportunities that cannot be ignored, which is why a framework around climate-related disclosures is so important. The Task Force brings that framework to the table, helping investors evaluate the potential risks and rewards of a transition to a lower carbon economy. We’re pleased to see so many businesses and investors around the world support the recommendations of the TCFD and hope others will be encouraged to join our initiative.”
Legal pressure in Europe
During the same month the TCFD released its final recommendations, article 173 of the 2015 French energy transition law came into force. The article forces institutional investors and asset managers in France to disclose how their business strategies cover climate change. Institutional investors, such as insurance companies and pension funds with a balance sheet above €500 million, are required to report both physical and transition risks.
In February 2017, the European Union passed a legislation that required pension funds to include climate change in their investment strategies. European pension funds manage over € 3 trillion on behalf of 75 million people. With this legislation investors are tasked with considering environmental, social and governance risks when defining their investment strategies. This includes acknowledging climate risks to medium and long-term investment decisions, as well as putting pressure on investors to drive adaptation action.
Motivation in the financial sector
In September 2016, BlackRock released a report stating that climate change is a significant risk and “climate-proofing portfolios is a key consideration for all asset owners,” adding, “risks are under appreciated, yet could soon start to unfold.” The publication by BlackRock, which is one of the world’s largest asset managers was a clear signal that the finance sector would have to step up to the plate in terms of climate change risks. The publication emphasised “The longer an asset owner’s time horizon, the more climate-related risks compound. Yet even short-term investors can be affected by regulatory and policy developments, the effect of rapid technological change or an extreme weather event.”
In October last year, the Financial Times reported that “In votes at seven of the largest US energy companies this year, the 30 largest investors switched their votes to support disclosure on climate risk a total of 38 times, having opposed similar resolutions in 2016, according to ShareAction, a campaign group.” In the same article, Rakhi Kumar of State Street Global Advisors said “As an index investor, you can hold all the companies in your portfolio to the same standard. You don’t need regulation,” illustrating just how important the private sector can be in driving climate action.
Now, following the release of the TCFD recommendations, a group of 16 leading banks is participating in a UNEP Finance Initiative project, co-lead by Acclimatise and Oliver Wyman, that will develop a harmonised methodology for the banks to help them strengthen their assessments and disclosure of climate-related risks and opportunities.
The financial sector’s engagement on climate change clearly gained momentum in 2017. Following Climate Action Tracker’s last report, which found that the world is still way off track to reach the Paris Agreement long-term warming goals, the sector’s action also comes at a critical time when private sector leadership is much needed to reduce global climate risks.
Acclimatise, Climate Finance Advisors (CFA), and Four Twenty Seven have released a new guidance document to increase the climate resilience of large infrastructure investments. The “Lenders’ Guide for Considering Climate Risk in Infrastructure Investments” clearly breaks down the ways in which physical climate risks might affect key financial aspects of prospective infrastructure investments. Ten sub-sectors, including airports, marine ports, gas and oil transport and storage, power transmission and distribution, wind-based power generation, data centres, telecommunications, commercial real estate, healthcare, and sports and entertainment, are analysed and illustrated with topical examples.
“Since Paris, private investors and asset owners have increasingly focused on what investment risks and opportunities are created by climate change. The Lender’s Guide developed by Acclimatise, Climate Finance Advisors, and Four Twenty Seven provides the first practical approach to assessing the impact of climate change on infrastructure investments for owners, developers, and lenders. For the first time, the guide provides infrastructure investors and lenders with a concrete approach to climate risks and opportunities,” said Jay Koh, Chair of the Global Adaptation & Resilience Investment (GARI) Working Group.
This guide provides a framework for questioning how revenues, costs, and assets can be linked to potential project vulnerability arising from climate hazards, such as increasing temperatures or sea-level rise. A heightened frequency of extreme weather events may lead to more disruptions of infrastructure service delivery resulting in lower revenues and increased expenses. In the United States for example, hurricane damage in 2017 to infrastructure in key economic centres, such as Houston, Texas, exceeded tens of billions of dollars (USD), not to mention losses to revenues and increased operating costs due to recovery efforts. In addition to the well-known costs from Hurricane Sandy to New York City’s transit infrastructure, that storm also led to 893 flights cancellations and knocked out about 25% of cell towers belonging to all carriers in a coastal area spread over 10 US states, leading to service (and therefore revenue) disruptions for infrastructure assets far beyond New York City. Additionally, incremental changes in climate such as water resource availability or temperatures are also likely to affect the operational and economic performance of infrastructure over time. Reduced precipitation can for instance decrease river flow and negatively impact the operability of hydropower facilities.
The guide also draws attention to the potential opportunities emerging from resilience-oriented investments in infrastructure. Concrete measures, such as replacing copper cables with fibre-optic ones, have proven successful in enhancing the ability of infrastructure to cope with extreme events and increasing revenue for companies who undertook such transformations.
John Firth, CEO of Acclimatise, states “Understanding the risks, as well as any opportunities, that might arise from a changing climate is paramount to infrastructure investments. This guide helps lenders integrate climate risks and opportunities into their strategic planning, hence improving the performance of their investments. Such a process feeds into the recommendations of the Financial Stability Board’s (FSB) Task Force on Climate-Related Financial Disclosures (TCFD). ”
Stacy Swann, CEO of Climate Finance Advisors notes that “Financial institutions play a pivotal role in scaling up and directing finance to address climate change. As a general matter, these institutions are always weighing risks against potential returns when seeking good, sustainable investments. Yet, climate risks are often overlooked in this process. This guide can help investment and credit officers begin to ask the right questions about how climate change can impact the financial sustainability of their investments, leading to better – more sustainable – investment decision-making.”
Yoon Kim, Director of Advisory Services at Four Twenty Seven adds “Incorporating climate change considerations into infrastructure investments enables investors proactively to identify and address the risks and opportunities presented by climate change. This guide helps investors and lenders unpack the question of how physical climate risks may affect key considerations related to infrastructure investments to inform investment decisions that make sense now and into the future.”
As the international community is moving forward with the implementation of the Paris Agreement, critical issues such as catalysing resilient investments occupy centre stage and raise questions across various fora, such as GARI. This guide emerged from ongoing discussions among participants of GARI during 2017, and is part of a growing global effort to deliver guidance to corporates and financial institutions to implement the TCFD recommendations.
Acclimatise is a UK-based climate change advisory and analytics company that specialises on climate change adaptation and resilience building. Acclimatise is a trusted advisor for many organisations across a wide range of sectors including government, finance, insurance, water, energy, transport, mining, agriculture, defence, food and beverages, and international development. The company’s 24 staff have successfully worked on more than 350 projects in over 70 countries for 180 public, private and non-governmental organisations. Acclimatise is currently involved in complementary projects for the European Bank for Reconstruction and Development, the Global Centre of Excellence on Climate Adaptation and the United Nations Environment Programme – Finance.
Climate Finance Advisors (CFA) is a consulting and advisory firm based in Washington, DC with extensive experience in development, finance, sustainability, and climate change. CFA’s mission is to facilitate the acceleration of sustainable, climate-smart investments and to encourage the integration of climate considerations into investment decision-making and underlying investments. The CFA team is comprised of bankers and finance professionals with more than 75 years’ collective expertise working at the intersection of finance, climate change, infrastructure and project development. The CFA Team has a deep understanding of the financial implications of climate risk for investments, and understands how risks are integrated into the investment decision making process.
Four Twenty Seven is an award-winning market intelligence and research firm specialized in the economic risks of climate change. Four Twenty Seven’s data analytics solutions bring climate intelligence to economic and financial decision-makers. Four Twenty Seven provides financial portfolio climate risk assessments, development of climate resilience strategies, quantification of metrics and indices for benchmarking, monitoring and evaluation, and training and stakeholder engagement to financial institutions, Fortune 500 corporations, and governments worldwide. The company was founded in 2012 and is headquartered in Berkeley, California with offices in Washington, DC and Paris, France.
The Global Adaptation & Resilience Investment Working Group (GARI) is a private investor-led initiative that was launched at COP21, the global climate summit in Paris in 2015. GARI is a partner of the UN Secretary General’s A2R Climate Resilience Initiative. GARI has brought together over 150 private and public investors, bankers, leaders and other stakeholders to discuss critical issues at the intersection of climate adaptation and resilience and investment with the objective of helping to assess, mobilize and catalyze action and investment.
Global insurance giant Zurich, one of the world’s largest companies, has published its updated position on climate change. The view of large insurance companies on the potential impact of climate change is particularly important, as they employ sophisticated models to assess the future risks from climate impacts. In short, it’s their dollar on the line. So what can we learn from Zurich’s view on climate risk? Here are my six takeaways:
The scale of climate risk is huge: Even with Zurich’s considerable resources and experience of risk analysis, they find climate change to be a tricky problem to pin down. In fact, they call climate change “perhaps the most complex risk facing society today.” The company knows that the risk to its business is potentially enormous, and the risk management solutions require considerable investment.
We will likely overshoot 2˚C: Zurich is not confident that the world will meet the 2˚C temperature target, let alone the more ambitious 1.5˚C goal. Their analysis finds that “the likelihood of missing the Paris Agreement’s target of limiting global warming to 2ºC or below is higher than achieving it.”
Insurers will put pressure on customers and investees to take action: Governments, businesses and individuals can expect insurance firms to increase the pressure on them to take action on climate change mitigation and adaptation. This will be seen in policy pricing decisions and through leveraging influence through their very large investment portfolios.
Climate regulations will become more stringent: Private companies, with insurance firms in the leading pack, will become increasingly vocal advocates for stronger climate regulations including, carbon pricing, ending fossil fuel subsidies, investing in new technologies, and building climate resilience. All of which Zurich calls for today.
Fossil fuel divestment is a train that can’t be stopped: Zurich intends to “Disengage and divest from those whose activities are predominantly focused on thermal coal if these companies have no plan to realign their business over time towards a low-carbon future.” This is likely just the start, fossil fuels are on notice.
Financial disclosure will provide a step change in climate action: The work of the Financial Stability Board’s Taskforce on Climate Change-related Financial Disclosure (FSB-TCFD), led by Bank of England Governor Mark Carney, is paying dividends. The TCFD is developing climate-related financial risk disclosure commitments for companies. Zurich is on board and more will follow. This requirement will lead to a step change in climate action, as companies analyse and understand their climate risk exposure and are compelled to take measures to protect the interests of their shareholders.
Learn more about Zurich’s position on climate change here: Zurich.com
This blog post was first published on LinkedIn and can be found here.
Acclimatise – together with UNEP FI, Oliver Wyman and Mercer – will develop a harmonized methodology for banks that will help them strengthen their assessments and disclosure of climate-related risks and opportunities. By using this harmonized approach, climate change assessments and disclosures will become consistent and comparable.
“One of the buzzwords in the sustainable finance world is ‘mainstreaming’,” notes Eric Usher, the Head of UNEP FI. “For us to achieve a sustainable financial sector we need to mainstream environmental factors from the periphery of financial institutions’ attention into their core decision-making. This is a key objective not only of UNEP FI but also of the TCFD. We are therefore very pleased to have the support of Acclimatise, one of the most recognized advisory firms on physical climate risk, as we work together with 16 global banks to operationalize and mainstream the TCFD recommendations into their core businesses.”
The Acclimatise team will focus on all aspects relating to physical risks under different climate scenarios. Acclimatise will help the Working Group develop scenarios and analytical approaches to better understand physical risks and their impact on physical assets and investment portfolios. The focus of the Oliver Wyman and Mercer team will be on transition risks associated with different scenarios for decarbonising the economy.
Acclimatise has worked on physical climate risk and adaptation with corporates and financial institutions for over a decade, helping them identify and respond to physical risks and to take advantage of emerging opportunities generated by a changing climate.
CEO of Acclimatise, John Firth, states, “The ability of firms to embrace climate risks and opportunities, and factor them into strategic planning will not only improve their performance, but will create a more resilient banking sector and economy. The methodology we are developing with the 16 banks in this project will be a means to start this process, as it aims to allow quantification and meaningful disclosure of physical climate risks and opportunities.”
Acclimatise is a UK-based climate change advisory and analytics company that specialises on climate change adaptation and resilience building. Acclimatise is a trusted advisor for many organisations across a wide range of sectors including government, finance, insurance, water, energy, transport, mining, agriculture, defence, food and beverages, and international development. The company’s 24 staff have successfully worked on more than 350 projects in over 70 countries for 180 public, private and non-governmental organisations.
It turns out that 2017 was uniquely disastrous to the United States in more ways than one with the National Oceanic and Atmospheric Administration (NOAA) attributing a cumulative damage amount of $306.2 billion to 16 separate disaster events, a record previously held in 2005.
Hurricanes Harvey, Irma and Maria combined with 2017’s extreme wildfires make up four of the 16 weather and climate disasters with losses exceeding $1 billion each. Overall, these events resulted in the deaths of 362 people and had significant economic effects on the areas impacted.
Since 1980, the U.S. has sustained 219 billion-dollar climate-related disasters with cumulative costs exceeding $1.5 trillion dollars. From 1980-2016, the annual average number of billion-dollar events was 5.8 whereas the most recent five years (2013-2017) saw an annual average of 11.6 events.
With $135 billion expected in insured losses, 2017 is also a costly year for the insurance industry, giving reinsurance companies such as MunichRe a primary role in helping people and communities rebuild in the wake of natural catastrophes.
As insurance companies are often required by law to buy reinsurance because they lack the capital resources to pay out if there is a major disaster, companies like MunichRe have a unique incentive to understand and predict these trends.
Additionally, this understanding has resulted in reinsurers being at the forefront of warning businesses and the public about the rise in extreme weather events due to climate change.
A MunichRe release in September 2010 noted it had analysed its catastrophe database, “the most comprehensive of its kind in the world” and concluded, “the only plausible explanation for the rise in weather-related catastrophes is climate change.
NOAA researcher Adam B. Smith agrees, citing climate change as a primary culprit in the frequency of these severe weather and climate events.
“Climate change is playing an increasing role in the increasing frequency of some types of extreme weather that lead to billion-dollar disasters,” Smith wrote in a blog post. “Most notably the rise in vulnerability to drought, lengthening wildfire seasons and the potential for extremely heavy rainfall and inland flooding events are most acutely related to the influence of climate change.”
Cover photo by Marcus Kauffman on Unsplash: Big Fall Creek Road, Lowell, United States, during the Jones Fire in August 2017.
Learn more about the role of NOAA’s NCEI data by clicking here and watching our video below:
In September, the Standing Committee on Finance (SCF) organized its annual forum to communicate and exchange information among bodies and entities and with other key stakeholders dealing with climate change finance in order to promote linkages and coherence.
The objective of this year’s SCF forum was to identify gaps in mobilizing and accessing finance for climate-resilient infrastructure and to provide high-level policy inputs and recommendations on how to scale up investment in climate-resilient infrastructure. In particular, it assessed trends in climate-resilient infrastructure, gaps and barriers and explored measures to close the gaps in climate-resilient infrastructure financing.
Recordings and documents to all sessions can be found on the UNFCCC website: LINK.
The video provides a summary of the main themes discussed by participants at the forum:
The scale of such destruction requires massive financial resources to catalyze and sustain recovery after disaster events, much less to address long-term climate adaptation and risk-reduction schemes. However, as traditional means of disaster aid fall short and needs go unmet, there is a need for a fundamental shift in post-disaster financing and room for the private sector to fill the funding gap.
Post-disaster financing falls short
Aid funding provided by governments, international NGOs, or humanitarian organizations often does not go where it is most needed or falls short. Following Hurricane Maria’s 2017 ravage of Puerto Rico, United States federal aid appropriations are expected to only cover around a third of the projected need for the island.
It is not only aid that is falling short. In 2016, MunichRE cataloged $175 billion in damages globally, but only 30 percent of those damages were covered by private insurance. Even though such assets were protected, the scale of these claims alone poses a huge risk to the insurance industry, which took a $35 billion loss in 2016. And often, disaster-insurance schemes (such as the National Flood Insurance Program in the United States) are backed by public resources that can be limited when many claims are filed.
An opportunity for the private sector – Adaptive Financing
Gaps in aid relief as well as preemptive insurance programs leave an opportunity open for additional innovation to meet post-disaster financing needs. The private sector has the opportunity to develop more tools to support disaster reconstruction and fill the gap that governments and international NGOs leave behind.
The limitations and opportunities for such innovation are addressed in our recent report published by Yale Center for Business and the Environment. The answer we propose is for banks to consider ways to offer economies affected by disasters more adaptive financial products.
Financial products include everything from mortgages to loans. Generally, financial institutions create fixed products and the customer chooses which works best. For example, a mortgage is a product which a client can typically buy with set terms. However, if a client wants to change the fixed terms of their contract, they have to refinance.
In contrast, if banks can figure out creative ways to offer flexible products, they could adapt these products to changes in customer needs. Imagine a loan product which could have the length of repayment automatically extended at no extra cost if the payee needs to request such an extension after a disaster. This could save the payee and bank from the pain and losses of default. Or a company could create a suite of products that have been preemptively designed for various disaster scenarios so that after an emergency, the most appropriate one could immediately be rolled out in a local market. This could help customers get back on their feet and bring in new business for participating banks.
There are many challenges to creating financial products given the complications that arise after a disaster. For example, it can be hard for financiers to assess risk and return in these uncertain environments using current risk-assessment models. In addition, it can be difficult to establish trust between financiers and recipients after a disaster. Therefore, creative solutions must be found to overcome these barriers.
The report dives into these and several other challenges and offers solutions suggested by experts throughout the field. Most importantly, to create such processes, financial institutions must create flexible supporting processes that allow finance providers to make ongoing adjustments to products in response to changing client needs. This requires a redesigned product-development process as well as a strong understanding of the specific challenges presented by disaster recovery.
Creating such financial products is neither easy nor straightforward, but companies that succeed can benefit from customer/supplier loyalty, enhanced brand reputation, and valuable experience that can push the capabilities of the organization and spur new internal innovation. We hope stakeholders can partner across the public, private and nonprofit sectors to incite change and adapt financial offerings in a time that is increasingly defined by disasters.
Laura M. Hammett is an urban resilience and climate change adaptation specialist whose research and professional experience span the intersection of sustainable land use planning, international development, climate policy and finance, and disaster risk management. Laura has worked to advance resilience programs at the US Air Force and United Nations World Food Programme, and she served as a community development Peace Corps Volunteer in Albania. Ms. Hammett recently completed a Masters of Environmental Management at Yale University and currently works with the United Nations Development Program to advance climate adaptation programming in Asian countries.
Katy Mixter – Consultant with the Boston Consulting Group
Katy Mixter is a graduate of Yale’s School of Management and School of Forestry and Environmental Studies (MBA/MEM). She has focused on the intersection between finance, environmental sustainability and development, working at organizations ranging from the Connecticut Green Bank to The UN Development Program. Prior to returning to school, Katy worked on Citibank’s Corporate Sustainability Team, helping support the company’s environmental policies, operations, financings and strategy. She now works at the Boston Consulting Group in Australia.
Cover photo by Roosevelt Skerrit (public domain): A road in the Roseau area, Dominica, is littered with debris, uprooted vegetation and felled poles and power lines from Hurricane Maria.