Climate risks are at the top of companies’ agendas. As companies respond not only to the changing severity of some extreme weather events on their own businesses, but also to the global requirements of reducing carbon emissions, climate change has regained its position as the top-ranked risk for European companies, leapfrogging pandemic and cyber risk. What role can risk managers play in helping their companies address climate risk? François Lanavère, head of business development at AXA Climate, and Stéphane Gobet, head of client and distribution for AXA XL in France, discuss the opportunity and the risks.
As the world begins to emerge from the grip of the Covid-19 crisis – although the pandemic is not over – focus has once again intensified on the global threat of climate change. The COP26 summit in Glasgow, Scotland in November last year gathered global leaders and climate experts to underline the goal of achieving global net-zero carbon emissions by 2050 and to keep alive the target of limiting global warming to 1.5°C above pre-industrial levels by the end of the century.
We continue to see the impacts from natural hazards like drought, wildfires, floods, severe winter storms, hurricanes and other weather events. The financial consequence of the severity of these events is stark, due to a combination of impacts from a changing climate along with growth in exposure from more properties in these regions. Estimates suggest that insured losses from natural catastrophe events topped $105bn in 2021, making it the fourth-costliest year ever – not to mention the millions more in uninsured economic losses.
The AXA Future Risks Report 2021 reveals that climate change is cited by European risk experts to be the biggest risk facing societies and companies during the next five to ten years, ahead of pandemic and cyber risk. And public sentiment too has meant that climate risks have risen back up the corporate agenda. Stakeholders in companies across all industries are now keener than ever to understand the ESG policies of the companies they work for, invest in and buy from. The physical and transition risk impacts from a changing climate – and how they are managed and reduced – forms an important part of these policies. And stakeholders want not only to see that companies have those policies in place, but that they truly embody them in their business models and act upon them at all levels of the organisation.
Given net-zero targets, companies’ boards are very engaged on this issue. Tackling the climate crisis is a business imperative for future resilience. Many large corporations have created the role of climate change officer to help their climate change adaptation processes and to promote best practice across their organisations.
What role, though, do risk managers have to play in this effort? And how can they increase their input into this dynamic and vital area of risk assessment, management and mitigation?
The risk manager’s role
While companies clearly have an increasing focus on a changing climate as a top-level issue, there is still some disconnect when it comes to assessing, measuring, mitigating and planning for climate risks at the corporate level.
A global study of companies’ uptake of the Task Force on Climate-related Financial Disclosures conducted last year by consultancy firm EY revealed that only 41% of respondents were conducting scenario analysis of their climate disclosures and just 15% currently feature climate change in their financial statements.
With their position as risk owners within their companies, risk managers have an important role to play in helping their companies understand, assess and adapt to this changing area of risk. But currently, we believe, too few risk managers are fully involved in the strategic assessment, management and mitigation of climate risks within their organisations.
AXA Climate conducted a survey in conjunction with AMRAE, the French risk management association, to discover how involved risk managers are with the effort to combat the physical risk associated with a changing climate, along with the roles they might play in helping their companies to reduce carbon emissions and transition to greener business models.
Given the huge challenge posed by climate change, the findings of our baromètre study were somewhat surprising. Some 43% of respondents said their companies did not explicitly manage climate risks, while only 20% of respondents said they were responsible for analysing and mapping climate risks within their organisations.
There is a huge opportunity for risk managers to drive their companies’ transformation in climate strategies.
Our survey found that many risk managers within French corporations did not have strong relationships with their companies’ ESG departments. Indeed, 20% of respondents described those relationships as “weak”. There is work to be done here. Risk managers must ensure that their role is a strategic one, that they have strong relationships with other stakeholders such as ESG teams and company c-suites, in order to be able to help their companies not only understand climate risks but prepare for the future.
Climate risks are a challenge for us all. But on an individual company-level basis, there are important steps that companies can take to transition to net zero, to assess their own vulnerabilities and to protect themselves from current and – crucially – future climate-related risks. Adapting for the future will be key – and risk managers with access to the c-suite and able to demonstrate a track record of climate risk expertise will be able to make a real difference to their companies’ resilience to climate risks.
One US-based client, for example, was aware of the hurricane exposure of some of its facilities. The risk manager secured investment for mitigation measures that will make those facilities resistant to a category four hurricane. Being able to show that the severity of storms – and therefore the risk to facilities in those regions – would likely increase, enabled the risk manager to improve the resilience of these facilities to future threats.
Our study revealed that flood risk is the weather-related risk that most worries respondents, with 92% citing it as a major risk. While flooding clearly is a major hazard for many companies it is a known peril. Only 40% of respondents, however, said they were concerned about storm surge risk – but this, in fact, is another really significant future threat.
At AXA XL and AXA Climate, we want to help our clients look at risk on a longer-term basis; we want to move from being just a payer of claims to being partners for our clients all the way along the risk journey. There are, we believe, important ways in which we can help clients to better understand and manage climate risks, ensuring that they are seen as leaders in the transition and securing our partnership now and in the future.
This is no longer simply about catastrophe modelling; it is about combining our understanding of risk and climate modelling. We can provide our clients with the analytics and insight that will ensure that risk managers can secure the investment in resilience that they need. As we look forward, we hope we can work with our clients to play our part – and help them to play theirs – in the fight to reduce the risks that a changing climate poses to our businesses and our societies.
Contributed by François Lanavère, head of business development at AXA Climate; and Stéphane Gobet, head of client and distribution for AXA XL in France