Category: Finance

Acclimatise selected to provide expertise to the EU TEG

Acclimatise selected to provide expertise to the EU TEG

By Robin Hamaker-Taylor

 As highlighted in a recent article, the European Commission is moving forward with their Action Plan for Financing Sustainable Growth. Now, Acclimatise have been selected as part of a group of experts that will advise the Commission’s Technical Expert Group (TEG).

Specifically, Acclimatise will provide technical input to the development of criteria which will help identify economic activities expected to make a substantial contribution to climate change adaptation objectives of the European Union. Co-founders of the company John Firth and Dr Richenda Connell will focus on providing input to the adaptation sub-group working on identifying financial services and insurance sector activities. The sub-group is co-chaired by experts from the European Bank for Reconstruction and Development and German development bank KfW.

Additional sectors that are also included for the development of adaptation-specific criteria are agriculture and forestry, information and communications technology (ICT), professional, scientific and technical activities and water supply, sewerage, waste management and remediation activities. These have been selected as they are among the most vulnerable sectors to the negative effects of climate change, and enable to test the adaptation taxonomy approach in natural resources, asset- and service-based sectors.

This input will contribute to the establishment of the EU classification system, known as the sustainability taxonomy, which will be used in the future to determine whether an economic activity is environmentally sustainable. In addition to establishing the sustainability taxonomy, the European Commission set up the TEG to assist it in developing the following:

  • an EU Green Bond Standard;
  • benchmarks for low-carbon investment strategies; and
  • guidance to improve corporate disclosure of climate-related information, including resilience.

The TEG commenced its work in July 2018. Its 35 members from civil society, academia, business and the finance sector, as well as additional members and observers from EU and international public bodies work both through formal plenaries and sub-group meetings for each work stream. The TEG will operate until June 2019, with a possible extension until year-end 2019. Acclimatise’s input into the adaptation elements of the sustainability taxonomy will carry on throughout spring 2019.

The full list of selected experts can now be found on the European Commission’s website for Sustainable Finance and is accessible via this link.

Cover photo by David Bruyndonckx on Unsplash.
2018 extreme weather caused $215 billion in economic losses

2018 extreme weather caused $215 billion in economic losses

By Elisa Jiménez Alonso

Aon’s latest Weather, Climate & Catastrophe Insight – 2018 Annual Report shows that the top 10 global economic loss events were all weather-related with the costliest being Hurricane Michael at $17 billion. The costliest event in terms of insured losses was the November Camp Fire racking up a bill of $12 billion. The total cost of weather-related disasters in 2018 was $215 billion out of the $225 billion total caused by all disasters (including earthquakes).

Top 10 Global Economic Loss Events. Source: Aon.
Top 10 Global Insured Loss Events. Source: Aon.

2017 and 2018 are the costliest back-to-back years for weather-related disasters on record, causing a total of $653 billion in economic losses. $237 billion of those losses were insured making 2017 and 2018 the most expensive back-to-back years for public and private insurers. 2018 was also the 4th costliest year on record for weather-related events with $89 billion of insured losses.

Overall, there were 42 billion-dollar disasters of which 39 were weather-related, 16 of those happened in the United States. Of the 18 billion-dollar insured loss events in 2018 all were weather-related and 13 of those events occurred in the United States. In the 21st century so far, tropical cyclones and severe convective storms represented 59% of global insured losses driven mainly by events taking place in the United States.

Aggregate Insured Loss by Peril Since 2000. Source: Aon.

The deadliest weather-related event were the Monsoon floods in India that led to 1,424 deaths, it sits in second place after the earthquake and tsunami that hit Indonesia in September and killed 2,256 people. Floods accounted for 36% of worldwide fatalities closely followed by earthquakes, which caused 31%. With 10,300 deaths, 2018 ranks among the 12 years with the lowest disaster-related fatality totals since 1950.

Top 10 Human Fatality Events. Source: Aon.

However, the geographic distribution of the numbers of economic losses versus human fatalities still tells a story of severe social inequality. Whereas most of the economic losses happened in wealthy nations such as the United States, Europe, and Japan, the vast majority of deaths (79%) occurred in the Asia-Pacific region. About 1.2 billion people in the Asia-Pacific region live in poverty which greatly impacts their vulnerability, especially when combined with the exposure of the region to extreme weather.

Click here to download the full report.

Executive summary infographic of Aon’s Weather, Climate & Catastrophe Insight. Source: Aon.

Cover photo by Coast Guard News/Flickr (CC BY-NC-ND 2.0): Coast Guard crews provide assistance post-Hurricane Michael in Mexico Beach, Florida, Oct. 14, 2018. The Coast Guard is working with local, state and federal partners for Hurricane Michael post-storm response across northwest Florida. (U.S. Coast Guard photo by Petty Officer 3rd Class Hunter Medley)
EU lawmakers move toward regulations facilitating a sustainable finance system – Part 1

EU lawmakers move toward regulations facilitating a sustainable finance system – Part 1

By Robin Hamaker-Taylor

In 2018 EU-level lawmakers made great strides toward facilitating a European financial system that supports the EU’s climate and sustainable development agenda. In late January 2018, the European Commission’s (EC) High Level Expert Group (HLEG) released a set of recommendations to inform the EC’s strategy on sustainable finance. The HLEG recommendations also inform the EC’s 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. Based on the HLEG recommendations, the EC developed their Action Plan for Financing Sustainable Growth by early March. In addition to the EC’s plans, the European Parliament and the Council have also made their own advances in the development of legislation in this area.

Following this hive of activity in 2018, it is now a good time to take stock of progress made by the European Commission, Council and Parliament in their efforts to facilitate a sustainable finance system and develop regulation. This two-part series will review the legislative proposals, actions, and reports made by these three institutions and reflect on what the year ahead might hold in terms of emerging regulations. This first part summarises the Commission’s recent activities and the second part will review the Parliament and Council’s 2018 activities together, which will be published in a following article.      

Legislative proposals

Shortly after the release of the Action Plan for Financing Sustainable Growth, the EC adopted a package of measures in May 2018, which will address some of the actions introduced in their Action Plan. These measures include the following three proposals:

  1. For a regulation on the establishment of a framework to facilitate sustainable investment. This is the framework which will set up the taxonomy of environmentally sustainable economic activity. Click here for the text of the proposal;
  2. For a regulation on disclosures relating to sustainable investment and sustainability risks and amending (EU) Directive 2016/2341, also known as the Institutions for Occupational Retirement Provision Directive II (IORP II). Click here for the text  of the proposal, impact assessment and summary of the impact assessment;
  3. For a regulation amending the low carbon benchmarks and positive carbon impact benchmarks regulation. Click here for the text of the proposal.

In addition to these proposals, the EC is planning to amend existing statutes or adopt new delegated acts from the following Directives:  

The intention with amending or adding new acts under these existing Directives is to further clarify how asset managers, insurance companies, and investment or insurance advisors should integrate sustainability risks or other sustainability factors into their activities.

Technical Expert Group

The EC subsequently established a Technical Expert Group on sustainable finance (TEG) in July 2018 to assist in the development of proposals which advance the action plan. The TEG is comprised of 35 members from the civil society, academia, business and finance sector and will be in place until at least mid-2019. There are four main tasks the TEG has been asked to fulfil, including:

  1. Technical screening criteria for environmentally sustainable economic activities under the EU taxonomy;
  2. An EU Green Bond Standard; 
  3. Minimum standards for the methodology of “low carbon” and “positive carbon impact” indices, and minimum disclosure requirements on ESG integration in the methodology of benchmarks; and
  4. Metrics allowing improving disclosure on climate-related information.

The TEG has produced a number of progress reports, but importantly, published its first final report on climate-related disclosures on 10 January 2019. This report relates to the 4th task, as listed above and will be considered when the EC updates the non-binding guidelines on non-financial disclosure that accompany the Non-Financial Reporting Directive (2014/95/EU) in June 2019.

Seeking feedback and next steps

The next steps for the first part of 2019 are for the EC to consider the above-listed proposals and consult stakeholders on these. Along these lines, the Commission is actively seeking feedback on various aspects of the 1st legislative proposal as listed above, or the taxonomy. The EC is seeking feedback specifically on the 1st round of climate change mitigation activities in the taxonomy (click here to submit feedback), as well as the taxonomy’s usability and fitness for purpose (click here to provide feedback). Feedback is requested until close of business on 22 February 2019.

Feedback is also requested on the TEG’s final report on climate-related disclosures, and can be provided here. This is requested until 1 February 2019.

The EC will hold workshops, on areas which will help to further develop the taxonomy, namely on:

  1. The development of new criteria for activities relating to those which help meet EU climate change mitigation objectives (the so-called ‘second round’ of climate change mitigation activities);
  2. The development of new criteria for activities relating to those which help meet EU climate change adaptation objectives; (so-called ‘adaptation activities’);
  3. The development of new criteria to assess ‘do no significant harm’ across all environmental objectives (e.g. climate mitigation, adaptation, sustainable use and protection of water and marine resources).

Further information on workshops and dates is provided here, and the below figure indicates these will be held between January and April 2019 prior to publishing the Taxonomy Report.

Timeline for Taxonomy development (Source: EU TEG).

It appears the trilogue process, where the EC, Council, and Parliament converge to develop final regulations, is still a way off for legislation relating to sustainable finance. This is not expected to commence until later in 2019, if at all this year. The Commission is, however, steadily laying the groundwork for this by moving forward their action plan, developing legislative proposals, and actively gathering feedback on them.

The next installment of this series will cover actions taken by the European Parliament and the Council, including the late 2018 endorsement of mandated disclosures by the Parliaments’ Committee of Economic and Monetary Affairs.

Acclimatise – experts in physical risk for responding to TCFD recommendations

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. We have witnessed the corporate, societal and environmental benefits stemming from the promotion of resilience-building strategies.

To discuss how your organisation can meet TCFD requirements, and assess and disclose physical climate risks and opportunities, please contact Laura Canevari: L.Canevari(a)

To discuss how changes and developments in climate-related regulations may affect your operations, please contact Nadine Coudel: N.Coudel(a)

Cover photo by Frederic Köberl on Unsplash.
Advances driving climate risk disclosures since 2017

Advances driving climate risk disclosures since 2017

By Laura Canevari

Following the release of the TCFD recommendations in July 2017, numerous events, initiatives, and publications have helped to progress climate-related financial risk disclosures in the banking sector. This article offers a summary of some of the key advances since 2017.

A summary of key developments since the publication of the final TCFD recommendations. Own image.

One of the first was established by the UN Environment Finance Initiative (UNEP-FI) which brought together 16 of the world’s leading commercial banks, established in autumn 2017. The group, supported by Acclimatise, developed and piloted publicly available methodologies which aided their responses to the TCFD recommendations. In late 2017, at the One Planet Summit in Paris, eight central banks and supervisors established a Network of Central Banks and Supervisors for Greening the Financial System (NGFS). This voluntary platform, which grew to 24 participating entities by the end of 2018, has amongst its aims to define and promote best practices that enhance the role of the financial system to manage and disclose climate risks.

January 2018 saw the release of the Final Report of the European Commission’s High-Level Expert Group (HLEG) on sustainable finance. The report set out a series of recommendations and aims to reform the European financial system to better support the EU’s targets under the Paris Agreement and goals of the 2030 Agenda for Sustainable Development. The HLEG called for effective disclosure of climate risks in line with the TCFD recommendations and requested the Commission to explore how the Non-Financial Reporting Directive (NFRD; Directive 2014/95/EU)requirements could be better aligned with that of the TCFD in its forthcoming review. Not long after, in March 2018, the European Commission’s action plan on financing sustainable growth was published, setting a clear roadmap for strengthening sustainability disclosure and accounting rule making. The Commission then began to develop a series of legislative proposals and amendments to existing EU Directives and developed a Technical Expert Group (TEG) to facilitate this.

Several other initiatives and reports helped to advance the foundations for future climate-related financial risk disclosures. In May 2018, the European Bank for Reconstruction and Development (EBRD) and Global Center on Excellence in Climate Adaptation (now Global Center on Adaptation) report “Advancing TCFD Guidance on Physical Climate Risks and Opportunities”, co-authored by Acclimatise, put forth 18 recommendations for corporates looking to disclose their risks and opportunities with regard to physical climate impacts. The report therefore provides important guidance for the development of metrics for standardising climate risk disclosures. In July 2018, UNEP-FI published the physical climate risk assessment methodologies its pilot group of banks had developed together with Acclimatise, as mentioned above. This is the first set of guidance and methodologies for assessing physical climate change risk and opportunities for the banking sector.

Throughout 2018, support for the TCFD recommendations continued to grow with many banks acknowledging the need to align with the TCFD recommendations in their annual report. This includes bankssuch as ANZ, BBVA, Barclays, UBSStandard Charter, Commonwealth of Australia and the Bank of Montreal. The first climate-related financial disclosures were released as well, building on the outputs from the UNEP-FI TCFD pilot initiative (see climate disclosures from CitiBank, for example). According to the TCFD Status report released in September 2018, supporting banks had disclosed information aligned with the TCFD recommended disclosures in their financial filings more than any other finance group examined and their most common disclosure related to information on climate-related risk identification and assessment.

Apart from the collective action of the NGFS, individual central banks have also started taking steps forward to encourage the assessment and disclosure of climate-related risks in the banking sector. In late September 2018, the Bank of England’s (BoE) Prudential Regulation Authority (PRA) released its first report on the potential impacts of climate. Through information collected from 90% of the banking sector surveyed, the report finds that most banks are starting to treat climate change risks as financial risks, as opposed to considering is as solely an ethical issue. The BoE study also finds that these risks are starting to be considered at the board level. Shortly after the release of their report, the PRA published a consultation paper in mid-October setting out expectations regarding banks’ and insurers’ approaches to managing the financial risks from climate change. The PRA accepted consultation responses until 15 January 2019. BoE’s Financial Conduct Authority (FCA) simultaneously published a discussion paper on the impact of climate change on other financial services , and is accepting responses until  31 January 2019. In this discussion paper, the FCA has requested feedback on a series of issues such as on the challenges faced by security issues when determining materiality from climate change, how comparability of disclosures would help investors, and what information should be disclosed in climate risk reports.

October 2018 also saw action amongst European and international actors. The UN Intergovernmental Panel on Climate Change (IPCC) published a special report on the impacts of 1.5 °C warming which have implications for the banking sector, including credit and market risks. Additionally the first NGFS progress report was released, summarising the preliminary findings of its stock take exercise of relevant national, regional and international initiatives. In addition to other reflections, the report notes that financial supervisors are starting to actively assess the prudential risks of climate change and beginning to set supervisory expectations to enhance financial risk management of supervised firms. A more comprehensive report from the NGFS is due to be published in April 2019. Furthermore, the European Financial Reporting Advisory Group (EFRAG) advanced the Commission’s action plan this month by appointing members to the European Lab Steering Group.This Group is expected stimulate innovations in corporate disclosure of climate risks in Europe.

To conclude 2018, a side event was held in December during COP 24, which looked at adaptation finance and the TCFD Recommendations. Hosted by Acclimatise, EBRD and the Global Reporting Initiative (GRI), this event discussed how multilateral development banks can help foster the TCFD recommendations among commercial banks, and how they can help advance metrics and methodologies for reporting climate finance in their portfolios.

This long list of events, initiatives, and publications shows that climate-related financial disclosures are increasing in importance within the banking sector, but what does 2019 hold? The Commission’s TEG has been quick off the mark, releasing their Report on Climate-related Disclosures on 10 January 2019. This is the first final report from the Group and proposes a set of guidelines in alignment to the TCFD recommendations. The guidelines will assist listed companies, banks and insurance undertakings in developing high quality climate-related disclosures that comply with the NFRD. Worth highlighting is the specific guidance for banks provided in the report, in particular for lending and investment activities. Together with the wider changes in EU legislation around the sustainable finance system currently unfolding, 2019 is expected to be a year of significant activity for climate action.

Acclimatise – experts in physical risk for responding to TCFD recommendations

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. We have witnessed the corporate, societal and environmental benefits stemming from the promotion of resilience-building strategies.

To discuss how your organisation can meet TCFD requirements, and assess and disclose physical climate risks and opportunities, please contact Laura Canevari: L.Canevari(a)

Cover photo by Florian Steciuk on Unsplash.
IIGCC puts forth guide for investors on climate scenario analysis

IIGCC puts forth guide for investors on climate scenario analysis

By Georgina Wade

The Institutional Investors Group on Climate Change (IIGCC) latest report, Navigating climate scenario analysis: A guide for institutional investors, offers a practical guide to applying the principles of scenario analysis in understanding climate risks and opportunities in portfolios.

Recognising climate change as a potential systemic risk to the financial system, the IIGCC says that investors must access and evaluate the material risk implications for their assets. Made up of seven sections, the report pulls from recommendations from the Task Force on Climate-related Financial Disclosures (TCFD), with the aim of establishing a consistent global standard for climate-related financial risk disclosures, covering both corporates and the financial sector.

In a five-step framework aimed at helping asset owners and managers use scenario analysis, the guide highlights how different climate scenarios could affect future returns and identify new investment opportunities. Amongst others, the document also features the methodologies developed by Acclimatise with UNEP FI and 16 commercial banks to assess physical climate risks to bank’s loan portfolios.

As Stephanie Pfeifer, CEO of IIGCC, explains: “Perhaps the most important conclusion of the guide we’ve published is that the journey is often the destination. Many benefits of scenario analysis for investors come through undertaking the process, experimenting with methodologies and learning about the ways in which climate change drives financial impacts. For some investors the exercise can affect strategic asset allocation, for others it is about evolving their understanding of risk and opportunity for parts of their portfolio”.

Case studies throughout the guide demonstrate that several investors are emerging as ‘early adopters’ of scenario analysis, despite the TCFD reporting that no asset managers surveyed have described how their strategies might change under different climate-related scenarios.

With climate change on our doorstep and the physical impacts becoming increasingly clear, there is an added urgency to ensure that investors are including climate change in their risk management processes. Christina Olivecrona, Sustainability Analyst at AP2, said: “The publication of the IPCC’s 1.5°C report […] was a powerful reminder that the physical impacts of climate change are not a distant and theoretical risk, but a present one. Investor methodologies in this area lag the corporate sector and we believe this area will need more attention from investors going forward.”

To access the full report, click here.

Cover photo by Evgeni Tcherkasski on Unsplash.

This New Climate – Episode 3: OASIS & the democratisation of climate data

This New Climate – Episode 3: OASIS & the democratisation of climate data

In the third episode of This New Climate, host Will Bugler explores how the OASIS group of companies are seeking to transform our ability to understand climate risk through a commitment to open source data. Climate data and information is at the very heart of efforts for insurance companies to price risk and respond to extreme events like hurricanes and droughts. Steve Bowen, Director of the Catastrophe Insight team at insurance giant Aon, explains why data was central to Aon’s response to hurricanes Harvey, Irma and Maria helping us understand why OASIS’s mission is an important puzzle piece to managing the global climate crisis.

Episode guests: Steve Bowen from Aon, Dickie Whitaker and Tracy Irvine from OASIS.

This New Climate is an Acclimatise production.

OASIS is an EIT Climate-KIC supported innovation initiative.

Further information:


OASIS Loss Modelling Framework

OASIS Palm Tree



Analysing physical climate risk: Approaches for the finance sector

Analysing physical climate risk: Approaches for the finance sector

By Georgina Wade

A new report by the ClimINVEST project offers a summary of existing approaches financial actors can use to analyse physical climate risks.

ClimINVEST is an initiative that aims to facilitate financial decision-making by offering tailored tools for institutions, bridging the communication gap between climate researchers and the financial community, and contributing to capacity building on adapting to climate change. The tools should also help financial actors to disclose climate risk in their portfolios, in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

Exploring the physical climate risks to a financial institution, the report “Getting started on Physical climate risk analysis in finance – Available approaches and the way forward” highlights the need for specific approaches to analyse physical climate risks to the financial sector and emphasises that action must be taken. A 2017 review sampling 80 financial institutions found that while 51 percent mentioned physical climate risks in their public documents, less than a quarter reported conducting a physical climate risk analysis. And while there are existing approaches out there, not all of the selected approaches cover every type of counterparties and every aspect of potential impacts.

The report provides an overview of available approaches. Selected service providers and approaches targeting different needs include Acclimatise’s Aware for Projects, WRI’s Aqueduct Water Risk Atlas, Carbon Delta’s Climate VaR, Carbone 4 CRIS and Mercer’s TRIP framework amongst others.

The authors conclude that even though financial institutions are increasingly becoming aware of physical climate risks, they still need to integrate them into their decision making. This is an opportunity for service providers to develop further services, however data availability is still a challenge as are imperatives of commercial business models. Finally, the authors highlight that further development of climate services might benefit from a co-design process between the climate change community and the financial community.

In its next phase, the ClimINVEST project will test a public interest co-design research approach to create actionable information on physical climate risk for financial institutions.

Access ClimINVEST’s full report by clicking here.

Cover photo by Boris Stefanik on Unsplash.
Bank of England plans to test climate resilience of UK banks

Bank of England plans to test climate resilience of UK banks

In what has been described as an unprecedented move for a central bank, the Bank of England plans to include the impact of climate change in its UK bank stress tests, possibly next year.

Mark Carney, governor of the Bank of England, said that he was exploring if climate change risks and opportunities should form part of the stress test in 2019. Since 2017, the Bank of England assesses on a yearly basis how well the UK’s biggest lenders could withstand a shock without needing a bailout from taxpayers. The goal for banks is not to pass or fail these tests but to scrutinise procedures to deal with a certain stressor.

The specific types of climate-related scenarios the bank could test have not been specified. However, lenders are already exploring how for example mortgage portfolios could be affected by flooding or how investments in the fossil fuel industry would fare under climate change. Acclimatise and UNEP FI also published a range of methodologies, developed with sixteen commercial banks, to help them understand how the physical risks and opportunities of a changing climate might affect their loan portfolios.

This announcement came in late December after a turbulent year of climate extremes, a very worrying IPCC report about the impacts of 1.5 degrees C warming, and after the WMO announcing greenhouse gas levels reached a new record. Also, a survey completed by the Bank of England in 2018 showed that only 10% of banks were considering their long-term climate change risks.

Carney also flagged that banks could be penalised through higher capital charges if they made investments in polluting sectors, such as fossil fuels, because these were more vulnerable to future regulations that could limit their activity. “We would be more open to a ‘brown’-penalising factor, if you will, because something that is quite damaging, quite polluting, one would expect at some point that there would potentially be some adjustment of regulation for that. And a consequence of that would potentially be higher risk,” Carney said.

Daniel Klier, HSBC’s global head of sustainable finance, said: “I think the right way of having this discussion is saying they are prudential regulators and want to make sure financial institutions are prepared. It’s less about a green-supporting or a brown-penalising factor: it’s about credit risk.”

The Bank of England carefully regulates and supervises financial services firms through the Prudential Regulation Authority (PRA) who in October 2018 published a consultation paper with the goal that firms would take a strategic approach to managing the financial risks from climate change, taking into account current risks, those that can plausibly arise in the future, and identifying the actions required today to mitigate current and future financial risks. Another recent paper by the Financial Conduct Authority (FCA), responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the PRA, set out how the impacts of climate change are relevant to the FCA’s statutory objectives of protecting consumers, protecting market integrity and promoting competition.

Cover photo by Policy Exchange/Flickr (CC BY 2.0): Bank of England Governor Mark Carney speaks at the 2015 Policy Exchange summer party.
World may become ‘uninsurable’ with climate change says IAG

World may become ‘uninsurable’ with climate change says IAG

By Will Bugler

One of the major challenges for responding to climate change are the limits of human imagination. It is hard to conceive of the profound changes that climate change has the potential to cause, so therefore people consider climate change and its impacts in the context of a world that looks broadly similar to today’s. Tearing the fragile fabric of this illusion is hard, however another few threads were tugged at in late 2018 as insurance giant IAG’s Executive Jacki Johnson said that climate change could essentially make the world uninsurable.

Speaking to the Financial Review, Johnson said that the insurance industry will not be able to operate effectively if we remain on the current climate trajectory. Her comments come as the UN Environment’s Finance Initiative (UNEP FI) announced that it has begun work with a group of 16 global insurance and reinsurers to develop new risk assessment tools that will help the industry better understand the impacts of climate change to their business.

The 16 companies represent around 10% of global insurance premiums and have US$ 5 trillion in assets under management. Their work will help the insurance industry fall in line with the guidelines and recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD).

UNEP FI’s partnership with the insurance industry follows similar initiatives with representatives from the banking sector. This year Acclimatise and UNEP FI worked with 16 top banks to develop methodologies to help the banking sector understand physical climate risk to their loan portfolios.

The threat to the insurance industry is considerable and incorporating climate change into risk models has proved to be a complex challenge. “Climate change and economic instability are amongst the biggest challenges we will face in the coming decades. We have no time to waste,” said Oliver Bate, Chairman of the Board of Management at Allianz. “It is not a question of getting the wheels turning, but rather how fast we can drive the change.”

Erik Solheim, the then Executive Director of UN Environment said “For generations, the insurance industry has served as society’s early warning system and risk manager by understanding, reducing, pricing and carrying risk. Its message now is loud and clear: climate change risk is intensifying and is a serious threat to the insurability of communities and economies around the world. An uninsurable world is a price that society could not afford.”

Cover photo taken from Pxhere (public domain): Storm surge damage on a coastal property.
New study: Companies around the world are vastly underestimating climate change risks to their business

New study: Companies around the world are vastly underestimating climate change risks to their business

By Anna Haworth

A new study, published this week in the journal Nature Climate Change, analysed disclosures from more than 1,600 global companies and found that many companies are failing to accurately characterise their climate change risk or adequately prepare for its physical impacts.

The study, authored by Conservation International and CDP, was based on responses to CDP’s annual climate change questionnaire, which asks companies to report on climate risk management strategies.  The study represents the first comprehensive analysis of climate risk reporting across multiple industries and sectors of the global economy.

Companies are recognising and reporting physical climate risks – from droughts, floods, cyclones, and changes in precipitation patterns and in average and extreme temperatures. Two-thirds of risks identified were viewed by companies as ‘more likely than not’ or ‘virtually certain’ to occur, and more than half of companies said that they expect climate change to increase their costs or disrupt production capacity.

Company strategies for managing the impacts of climate change were sorted by the researchers into three categories: ‘soft’ strategies, such as conducting risk assessments and updating emergency response plans; ‘hard’ approaches that involve capital investments in technology or infrastructure, such as flood control and air conditioning; and ecosystem-based adaptation, such as grasslands restoration, sustainable agriculture and forestry, or conservation of coastal ecosystems.

Types of adaptation strategies being reported by companies, divided into soft, hard and Ecosystem-based Adaptation (EbA). The size of the circles represents their relative use overall.

The most common approach to climate change, employed by 39% of companies, involves a mixture of soft and hard strategies. One third of companies use soft strategies only. Notably, 18% of companies did not disclose any adaptation strategy for the physical climate risk identified.

The researchers state that “companies’ disclosures on climate risk reveal a preference for incremental or reactive adaptation strategies.” Companies are retaining the language of risk management and “too often translate the complex challenge of climate change into solutions that align with business-as-usual practices.”

The study finds that while many companies are trying to incorporate climate change into their risk management practices, five key ‘blind spots’ are preventing businesses from adequately preparing for its impacts:

  1. The magnitude and costs of physical climate change risks. Of the companies surveyed, which represent 69% of global market capitalisation, they are collectively underreporting climate risks to investors by at least 100 times. This reflects the fact that a large number of companies do not report financial impacts and those that do, are probably underestimating them.
  2. Climate change risks and adaptation strategies ‘beyond the fenceline’. Despite evidence that climate change will have wide-ranging impacts for businesses, most companies have focused their adaptation strategies on a small set of impacts to direct operations, not taking into account supply chain, customer, employee, and wider societal impacts.
  3. The potential for Ecosystem-based Adaptation (EbA). The huge win-win potential of ecosystem conservation, restoration and sustainable management, to both reduce the physical impacts of climate change and deliver other co-benefits, is largely being ignored.
  4. The costs of adaptation. Only a limited number of companies are reporting the up-front cost of climate change adaptation measures. These are largely framed in terms of ‘management costs’, which do not necessarily represent additional expenditures on adaptation. Few companies are calculating the return on investment, the relative cost effectiveness of different strategies, or the cost of doing nothing. The near-absence of these cost comparisons limits investors’ ability to understand or assess the strategy against available alternatives.
  5. Nonlinear climate risks and the need for radical change. Most corporate adaptation strategies assume that climate change risk is basically linear. But science increasingly suggests the existence of ‘tipping points’ – such as sudden permafrost thaw, ice sheet loss, or Amazon forest die-back – that could lead to more abrupt changes and severe risks to businesses and society as a whole. The authors conclude that “radical adaptation for radical change, it seems, is not yet part of the business agenda.”

The study closes on a more positive note, stating that these barriers to improved disclosure and ultimately better climate change adaptation strategies are not insurmountable. The authors highlight that corporate governance structures matter for climate change reporting. Furthermore, mandatory reporting requirements and standardised performance indicators would facilitate more transparent and robust reporting. The 2017 Task Force on Climate-related Financial Disclosures (TCFD) recommendations has provided impetus for companies to report the financial implications of climate risks and many companies are now reporting in-line with these recommendations. In 2018, CDP has also aligned its reporting with the TCFD recommendations, meaning that companies can more clearly communicate their risks and management approaches to their investors and customers. Finally, in cases where adaptation action offers benefits for multiple actors and become ‘public goods’, new partnership models may be required to enable costs to be shared, both with other companies and with governments.

Goldstein, A., Turner, W., Gladstone, J. and Hole, D. (2018). The private sector’s climate change risk and adaptation blind spots. Nature Climate Change. (paywall)

Cover photo by Lieut. Commander Mark Moran, NOAA Corps, NMAO/AOC (CC BY 2.0): Views of inundated areas in New Orleans following breaking of the levees surrounding the city as the result of Hurricane Katrina. September 11, 2005.