Risk managers urged to prepare for climate transition

Risk managers need to consider the impact of climate change on their organisations, as investor and consumer power is set to bring about rapid changes in business models and strategy, according to Zurich’s chief risk officer. But she warned that climate change risk is not on the agenda of most boards. In a recent report, Zurich urges companies to act now and prepare for climate change. Ahead of the Climate Week event in New York, Zurich said analysis suggests that current efforts to control global temperatures will likely fail, so companies should take steps to measure the magnitude of the risk and develop a climate resilience adaptation strategy. Its comments preceded a UN report that concludes there is potentially just a dozen years left to limit serious impacts from global warming. It says urgent and unprecedented changes are needed to reach targets set under the Paris Agreement and cut risk of extreme heat, drought, floods and poverty. In its report, Zurich states that the physical impacts of climate change will take many decades to fully materialise, but will be irreversible. Climate change is likely to include more extreme weather, such as more intense hurricanes, higher rainfall and rising sea levels, which will result in more dangerous storm surges and flooding, it says. According to Zurich, companies need to consider two main scenarios – the failure to act on climate change, resulting in rising physical risk, and a transition phase where society takes measures to reduce carbon emissions. The risks and opportunities from this transition are potentially of more immediate relevance for companies, according to Alison Martin, group chief risk officer at Zurich, who attended the gathering of investors and CEOs in New York. While climate change has its sceptics, the weight of opinion is likely to require companies to respond to the threat and opportunities of climate change, she said. Investors and regulators will require more transparency and disclosure of climate change risk, while consumers’ attitudes to environmental issues can change rapidly, she noted, in the same week that corporate social responsibility was one of the two main themes at Ferma’s seminar in Antwerp. “Climate change will introduce risk to an organisation. Every industry will be impacted in some way, whether that’s transportation, construction, agriculture, energy, even consumer goods, while climate change will increasingly need to be a factor in infrastructure investment in the near future. To ignore it is shortsighted,” Ms Martin told CRE. She warned that organisations will face a “transition risk” as the world shifts from fossil fuels to cleaner energy sources. While climate change is expected to present physical risks in the longer term, and is already producing more severe storms and floods, transition risks are likely to come about sooner and have a bigger strategic impact on business, Ms Martin said. “It doesn’t matter what you believe, it’s about what might happen and the impact on the macroeconomic environment. If investors have certain expectations, or if there is a change in consumer behaviour, it will drive climate-related risks and opportunities,” she said. Tipping points can be reached overnight, noted Ms Martin, with implications for supply chains and consumer demand. For example, the increased awareness of plastic pollution has seen changing consumer attitudes towards plastic packaging and single-use plastics, including a proposed EU ban on plastic drinking straws and other single-use plastics. Some investors are also shying away from fossil fuel investments. A number of European insurers, including Zurich, have stopped investing in, or underwriting risks related to, coal mining, or industries that derive a large proportion of revenue from burning thermal coal. “A rapid transition would have a meaningful impact. We could quickly see an exponential curve as society looks to address the risk of climate change,” she said. Ms Martin noted there is a danger that companies focus only on the risks of climate change and overlook the opportunities, such as new products and markets. Climate change adaptation will see investment in clean energy, new forms of transport, smart grids and cities, as well as more efficient products, buildings and lifestyles. Some $90trn of investment will be required during the next 15 years, according to the UN’s Framework Convention on Climate Change and the International Energy Agency. Climate change risk is increasingly becoming a governance issue, namely through voluntary or mandatory reporting of climate change risk, according to Ms Martin. Investors are requiring more disclosure, as are some regulators. For example, the European Commission’s Action Plan for Financing Sustainable Growth is considering compulsory disclosure as set out by the Financial Stability Board’s Taskforce for Climate Related Financial Disclosures. “Climate change risk disclosure is increasing and is something we will see more of in the years ahead,” said Ms Martin. With more disclosure, risk managers will increasingly be called upon to help identify and measure climate change risks, she explained. “The role of the CRO is to make all risks clear to the board and consider how they pertain to strategy over the long term,” said Ms Martin. In its report, Zurich recommends companies follow three risk management steps as part of a climate resilience adaptation strategy: identify the broad business and strategic risks; develop a granular view of the risks including individual locations; and develop a mitigation strategy involving insurance and resilience, as well as strategic implications for business models. Following a recent risk management event attended by some 70 Zurich clients, Ms Martin found that climate change is high on the agenda for some risk managers, especially those that have experienced its physical impact. However, the majority of risk mangers do not yet have climate change risk on their board’s radar, she said. But Ms Martin believes traditional risk management techniques can go a long way to tackling climate change risks, even if new tools are required to help quantify their financial impact. Zurich is working to incorporate broader climate risks into its modelling and hopes to roll this out in the next few years, she said.

Risk managers urged to prepare for climate transition

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