The “Tragedy of The Horizon:” the Economic Risk of Global Warming

On September 29th, Mark Carney, recently appointed Governor of the Bank of England, gave a speech on the risks of climate change to financial stability at a Lloyd’s insurance event. Carney referred to climate change as the “tragedy of the horizon,” citing outcomes like the impact of rising seas on the world’s coastlines and infrastructure as one of the largest risks to financial stability around the world. Carney cited three major risks to financial stability from climate change.

1.    Climate change presents physical risks

First risk: “The impacts today on insurance liabilities and the value of financial assets that arise from climate- and weather-related events, such as floods and storms that damage property or disrupt trade.”

In the context of sea level rise, the impacts of climate change on infrastructure and property along the world’s coastlines are readily apparent. Carney referenced a Lloyd’s study that “estimated that the 20 cm rise in sea-level at the tip of Manhattan since the 1950’s, when all other factors are held constant, increased insured losses from Superstorm Sandy by 30 percent in New York alone.”

Rising seas already compounded the impact of hurricane Sandy, knocking out power grids, flooding subways and causing financial damages estimated to be between $30 billion to $50 Billion. Under current projections of sea level rise up to a 6.6 foot increase is possible by 2100; and as oceans rise so will the physical impact of superstorms.

A U.S Army Corp of engineers and the National Weather service map of storm surge inundation if it hit with sea level rise projections for 2100, illustrating economic risk of global warming
A U.S Army Corp of engineers and the National Weather service map of storm surge inundation if it hit with sea level rise projections for 2100.

2.    A changing climate creates liability risk

Second risk: “The impacts that could arise tomorrow if parties who have suffered loss or damage from the effects of climate change seek compensation from those they hold responsible.  Such claims could come decades in the future, but have the potential to hit carbon extractors and emitters – and, if they have liability cover, their insurers – the hardest”

Carney suggests that those who suffer the majority of asset loss from climate change could look to hold polluters, governments or private firms accountable for risk exposure.

Nestle is now being sued for the use of water in Southern California and their impact on the California drought. Lawsuits against corporations, governments or private land owners who have shifted the true costs of their behavior onto the commons have the potential to be held accountable for their behavior as extreme weather events become more common and impactful.

Liability for the loss of property and adverse health affects due to climate change are not only held by private firms, but also my American taxpayers. In Alaska, the town of Kivalina is already being displaced by sea level rise and melting sea ice. In response the Obama administration has proposed $50.4 Million in federal aid for relocation costs.

3.    Climate change will create more stranded assets

Third risk: “The financial risks which could result from the process of adjustment towards a lower-carbon economy.  Changes in policy, technology and physical risks could prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent.”

What Carney is getting at here is the fact that an assessment of liability will change the valuation of an asset. This includes what is commonly referred to as “stranded assets”, in particular fossil fuel reserves — and the plants that process and burn them — will become useless is a world focused on carbon-free energy.  But it also includes a much greater class of assets that could become stranded, for example real estate on properties that experience frequent and increasing flooding. After the world has seen enough primary property loss and secondary liability loss due to impacts like rising seas our markets will compensate by devaluing at risk assets.

Conclusion

Climate science has been warning us for decades that the impacts of unbridled emissions are on the horizon, but what Carney adds to the conversation is the translation of the risks into financial terms. As acceptance and information about climate change increase so too does the desire to find innovative solutions that build resilience into how we do business and navigate the risks.  Being informed about the potential impact of sea level rise and extreme weather events can help industry and government adapt and keep out of the deep waters of rising seas.

 

By Sam Irvine

Can we prepare better? Managing risk in a context of uncertainty

On October 3rd, the Obama administration declared a state of emergency in South Carolina in the wake of Hurricane Joaquin, which dumped a foot and a half of rain in approximately 24 hours on the Carolinas, caused floods from New Jersey to Georgia and sunk cargo ship El Faro and its crew. While the Charleston and many other cities were battling the floods, with a cost estimated at over $1 billion, France was also experiencing unexpected flash floods near Nice, which caused 17 death.  Landslides in Guatemala also claimed the lives of 186 people and were catalyzed by a strengthened El Nino. When considering each event in isolation, it may be possible to overlook the connection between the storms intensity and climate change. Together these extreme weather events are indicative of a larger trend; while we can’t predict where the next big storms will hit, we do know they are becoming more frequent and stronger.

Floods in South Carolina
Flooding in South Carolina. Photo by Sean Rayford/Getty Images

These serve as yet another wakeup call to remind us that we are already experiencing the impacts of climate change, and that our communities, cities and business need to be prepared for the stormy weather. But, as humans, do we require a crisis to mobilize us into action? Or can the same results be sparked through other methods without the loss of life, property and human well-being?

Climate scientists have warned for years of how climate change will increase the intensity of hurricanes, and the Southeast U.S. is a highly exposed region for such hurricanes. Yet many of us act as if the storm was always going to hit next door, and fail to apply our rational understanding of risk to better preparedness.

At Four Twenty Seven, we created Climate War Games to put executives and decision-makers into the context of the increasing risks presented by climate change. Gaming and simulation provide teachable moments, which we can apply to our real world behavior.

Climate War Games
Operation, probability and climate outlook cards from the Climate War Game

In game play, we assign the players to companies and task them with running their business while getting through a number of rounds in which they experience unpredictable extreme weather events. We break down uncertainty by type of event and their varying impacts to supply chains and infrastructure that can be damaged by extreme precipitation or temperature.

While the specific outcomes are unpredictable, because they hinge on a dice roll, the risk profile of each player’s hand is clearly laid out, so as to enable teams to understand their company’s risk profile and adopt the most cost-effective portfolio of adaptation measures. The winner is the company that earns the most profit – and  limits its losses — that way, game play reflects the same challenges organizations face in the real world.

The game emulates the escalating risk of climate volatility and simulates through dice rolls the increasing likelihood of “black swan events” with low probability of occurrence, but high consequences and subsequent costs.

Players have to make the same tough choices they would in the real business world between saving or spending, and we see teams approach the choices in both creative and conventional ways. While there are different ways to play, the real value of the game comes from knowing that the risks actually create business opportunities, and acting through an informed strategy pays out over the long run. The game also helps participants reflect upon the potential human implications of their risk mitigation strategy.

Confronting the reality of what climate change is going to bring upon us can feel overwhelming at times. By providing a safe environment with clearly delineated risk profiles, and challenging players to make decisions and take action in a context of uncertainty, we help break down mental and cultural barriers to corporate adaptation, and set participants on track to build climate resilience. We do not know where the next storm will hit, but we can and should prepare to the best of our ability using climate science and probabilities.

Learn more about Climate War Games and our training courses offering here.

By: Sam Irvine

Audio Cast: Climate Data and the Bottom Line

We recorded Emilie’s presentation at the Risky Business Climate Data Summit in New York, NY – September 24, 2015, during the panel discussion Listening to End-Users: Climate Data and the Bottom Line.

Emilie’s presentation focused on the different end-users inside the corporation, their specific goals and needs, and common challenges in using climate data for business decision-making. She concluded with specific pointers on how to overcome these challenges and ensure businesses become more resilient to climate change impacts. The panel also featured Susan Ruffo from Bloomberg Philantropies, Don Reed from PwC and Curtis Ravenel from Bloomberg.

Listen to the 10 min presentation and contact us to discuss how your organization can better incorporate climate change science in strategic planning.

Weathering the Next Storm: a Closer Look at Business Resilience (C2ES)

C2ES published on September 22 the most recent installment of its series on business climate resilience: Weathering the Next Storm, a Closer Look at Business Resilience. The report builds on years of research and earlier reports to identify how Fortune 100 companies approach climate risk.

The C2ES team reviewed three main types of public disclosures from Fortune 100 companies: their annual financial filings (10-K), their corporate sustainability reports, and their reporting to CDP. C2ES also conducted in depth interviews and organized several workshops on business resilience over the past years.

The report provides rich data and analysis directly applicable to our core mission and interests, and we wanted to highlight the key takeaways from the report .

1) Global corporations are aware of climate risk. Finding strategies to manage those risk are harder to find.

While 91% of respondents publicly acknowledging climate risks, this awareness often does not translate into concrete actions to identify and mitigate risk.

While acknowledgement of climate risk is high, concrete actions to mitigate risk remain unusual.
While acknowledgement of climate risk is high, concrete actions to mitigate risk remain unusual.

2) Tracking and assessment of risk are at highest levels ever.

The overall number of companies taking action to understand their risk is on the rise.

The C2ES report states, “Of the companies interviewed, 77 percent have conducted or are in the process of conducting a vulnerability assessment of some kind.” While the scope and depth of those assessments very greatly between sector and organizations, the assessments indicate that companies are establishing a baselines and recording data, creating the foundation needed to build business resilience strategies.

3) Water is the immediate stressor. Drought has been a wake-up call.

 Many assessments are motivated by increased stress on water resources. The C2ES study states “drought can be an important stressor, as can other events or trends affecting water supply and demand, such as flooding, changing precipitation patterns, reduced snowpack, heat waves or salt water intrusions associated with sea level rise.”

We observed similar responses in the 2015 Corporate Adaptation Survey where water scarcity emerged as the climate hazard of greatest concern for corporations, with 16 percent of respondents citing it as a risk.

4) Climate impacts are both Macro and Micro in scale.

A challenge of building resilience lies in part in the fact that the impacts of climate change are widespread, but direct responses to risk must be local are local. The indirect activities outside corporations’ sphere of influence needed to build resilience are harder to identify, and even more challenging to implement without larger support. The C2ES report refers to these indirect activities as being outside a “”fence line” to critical supply chains and infrastructure, and can be effectively managed only in partnership with the public sector.”

Climate Risk

The report establishes a need for the public and private sectors to leverage complementary strengths achieve climate resilience.

5) Current best practices are based off of history, not projection of future risk.

C2ES notes that many companies use historical events and data to project future risks – they are considering future changes in weather and climate, or using climate projections of how these and other risks would change over time.”

Using historic data risk assessment strategies is inherently reactive, rather than proactive. Corporations need to integrate climate projections to prepare for “the next storm,” but the report indicates that despite the rapid increase in data availability, finding suitable granular data that meets organizational analysis needs is still a challenge.

Climate data for business resilience

6) One size doesn’t fit all.

While there is a clear desire for guidance on how to overcome the barriers to resilience, the methods needed to overcome those barriers are different across organization. According to the report, “some companies start at different points and pursue risk management in a different order. For example, some companies are starting with a narrowly scoped vulnerability assessment that examines only one region or only one impact to raise internal awareness and assess the need for a broader vulnerability assessment.”

Assessing Climate Risk

 

Next steps

Addressing the challenges identified by the C2ES report and previously in our 2015 Corporate Adaptation Survey is a critical first step to supporting business resilience. Our team focuses on developing tools and strategies to overcome these challenges in practice.

By delivering customized climate risk assessments that speak to sector and company’s specific activities and locations, we empower operation managers to take concrete actions and mitigate risk. By simulating decision-making in a context of uncertainty, we encourage our clients to think creatively through scenarios and equip them to confront uncertainties and reach consensus. And by working hand-in-hand with corporations, local governments and business associations, we create a space for a fruitful dialogue over the proverbial “fence” and encourage cross-sector partnerships that support our collective resilience. We encourage you to reach out and learn about what climate change means for your organization.
By Sam Irvine