This joint report provides a comprehensive analysis of the ways in which climate risks affect sovereign risk, demonstrating new empirical evidence of how climate risk and resilience influence the costs of capital. It also explores the implications for Southeast Asia in particular, where countries are highly exposed to climate change risks and their economic consequences. Lastly, the report outlines five policy recommendations based on these findings. The report was a collaboration between the Centre for Sustainable Finance at SOAS University of London, the Asian Development Bank Institute, the World Wide Fund for Nature Singapore and Four Twenty Seven.
“Climate Change and Sovereign Risk” outlines six transmission channels through which climate change affects sovereign risk and in turn the cost of capital, providing examples of each and explaining how they’re connected. It uses empirical analysis to demonstrate the significant impacts of climate risk exposure on the cost of capital. Using a sample of 40 developed and emerging economies, econometric analysis shows that higher climate risk vulnerability leads to significant rises in the cost of sovereign borrowing. Premia on sovereign bond yields amount to around 275 basis points for economies highly exposed to climate risk. This risk premium is estimated at 113 basis points for emerging market economies overall, and 155 basis points for Southeast Asian economies.
To further explore these channels, the report provides a closer look at Southeast Asia, a region with significant exposure to climate hazards such as storms, floods, sea level rise, heat waves and water stress. Physical risks are expected to considerably affect economic activity, international commerce, employment and public finances across Southeast Asian countries. Transition risks will be prominent as exports and economies become affected by international climate policies, technological change and shifting consumption patterns. The implications of climate change for macrofinancial stability and sovereign risk are likely to be material for most if not all countries in Southeast Asia.
The report highlights the need for governments to climate-proof their economies and public finances or potentially face an ever-worsening spiral of climate vulnerability and unsustainable debt burdens. It outlines five policy recommendations, emphasizing the importance for financial authorities to integrate climate risk into their risk management processes and for governments to prioritize comprehensive climate vulnerability assessments and work with the financial sector to promote investment in climate adaptation.
Introduction: Companies Begin Adapting to Climate Change
Increasingly severe and frequent extreme weather events and chronic stresses are threatening urban communities and economic stability globally. In September 2019, during Typhoon Faxai almost a million people lost power throughout Tokyo and commuter trains were canceled. Evacuations were ordered, disrupting both residential life and business operations. Sony stopped operations at a PlayStation 4 console manufacturing site due to power outages, a Nissan production facility was partly flooded, and 10 shipping containers tipped over at Tokyo Port. In the United States, Hurricane Dorian led to the closure of ports spanning from Miami to Georgetown, with implications for local and global trade and the businesses downstream in the supply chain.
Businesses are increasingly aware that climate change hazards pose financial risks through operational disruptions and repair costs. Some corporations are beginning to implement resilience measures, investing in forward-looking climate risk assessments, considering flood resilience measures for their facilities, and improving their water efficiency. However, asset-level preparedness is only the beginning of essential climate resilience measures that businesses must take. Economic resilience is integrally connected to community resilience because corporations rely on functional transportation, power, and water infrastructure for their operations and depend on the city residents that make up their employee and client bases.
Economic Resilience & Community Resilience: Two Pieces of the Same Puzzle
Economic resilience is critical to community resilience, while business continuity is also dependent on resilient communities and infrastructure. Local businesses underpin local economies, which are key to maintaining stability within a city. As credit rating agencies increasingly integrate physical climate risks into their municipal bond ratings, cities’ preparedness for climate impacts will shape their access to capital. Economic stability is a key element in credit rating agencies’ methodologies for determining municipal credit ratings. Thus, the resilience of local business and economic activities to climate impacts will be a key feature of assessments of city climate resilience.
Likewise, local businesses contribute directly to community resilience. Job opportunities attract new residents to cities and a growing population means a growing tax base, with more financial resources to invest in adaptation. When local businesses recover quickly after extreme events, residents retain their jobs and are more likely to stay in the area, both sustaining the tax base and maintaining social capital—an important element of urban resilience. When businesses are resilient to extreme events they can also offer emergency support, including turning their facilities into shelters, offering food, and donating rescue and first aid equipment, as seen after Hurricane Harvey hit Houston in 2017.
However, it is not a one-way relationship. If a catastrophic hurricane or wildfire destroys homes, displaces residents, and disrupts transportation infrastructure in a city, even climate-proofed corporate facilities will not be able to operate effectively. If employees cannot get to work safely or if they are displaced from the area, business operations may be disrupted. Likewise, if goods cannot be transported to and from a manufacturing facility or storage center, disruptions can ripple through supply chains with wide economic impacts. During Japan’s deadly rainfall in July 2018, Mazda Motor Corporation’s headquarters incurred no major damage. However, operations were halted for days because over 100 employees had flooded homes and many faced challenges traveling to work.
Innovation: Partnering Across Sectors for Shared Resilience
Since the resilience of businesses and cities is inextricably connected, the most effective resilience-building will involve collaborating towards shared resilience. Private and public sector stakeholders often use different terms, have different operating and planning processes, and are unaccustomed to collaborating with counterparts from the public or private sector. The development of a model for private-public partnerships that leverages respective strengths and advances shared climate resilience priorities, is a needed innovation.
Businesses and governments must work to establish trust and create a shared language around climate risks, establishing a foundation for successful collaboration on proactive adaptation and resilience planning as well as disaster response. Each can engage by identifying and contributing their strengths to shared efforts. Businesses can provide resources for the adaptation planning process and implementation, including technical expertise, staff time, and financial resources. For example, Facebook contributed over $200,000 to the development of the San Francisquito Creek Joint Powers Authority’s strategy for sea level rise resilience along the San Francisco Bay, which had implications for its Menlo Park campus. These local vulnerability assessments or adaptation plans can inform businesses’ own resilience-building efforts, while climate risk assessments completed for corporate risk management initiatives can also inform regional resilience planning. Information-sharing goes both ways.
Corporations rely on community adaptation to build resilient regional infrastructure and minimize the impacts of extreme events on their assets. Private-public partnerships can be an important mechanism for building support for these initiatives. For example, the Bay Area business community was influential in passing Measure AA, the regional parcel tax to restore the San Francisco Bay and improve resilience to flooding.
Private-public partnerships can also identify opportunities to increase regional preparedness for extreme events. For example, Airbnb works with San Francisco’s Hub for Emergency Preparedness and Portland, Oregon, to enable hosts to offer their homes for free and for other residents to open their homes to disaster victims in areas affected by an extreme event. This system allowed Airbnb to provide lodging to residents in the wake of Hurricanes Harvey, Maria and Irma in 2017, potentially reducing emigration and increasing the possibility of residents continuing to go to work.
As companies begin to incorporate forward-looking climate risk assessment into their processes, they are increasingly well positioned to engage with the surrounding community to support informed resilience building. Likewise, local governments can bring their understanding of climate change impacts on city infrastructure and operations to inform collaborations with the businesses in their community. Effective partnership, leveraging shared objectives and values, as well as unique capabilities, is called for now to improve economic and urban resilience in the face of changing climate conditions.
This article was originally posted by NewCities and was written with support from Yoon Kim.
July 15, 2018 – 427 ANALYSIS: Record-setting rains in Japan led to floods and landslides that disrupted business operations of automobile manufacturers, electronic companies and others. Understanding the ownership and operations of facilities located in the damaged areas provides insight into what companies and industries may exhibit downturns in performance over the near term and be vulnerable to similar storms in the future.
Japan was the inundated by over 70 inches of rain in early July, an event that resulted in significant loss of life and business disruptions. The clouds have since receded, leaving economic damage with long-term implications yet to be understood. However, estimates expect industry losses to be in the billions USD. Destruction was centered in Okayama and Hiroshima, driven by flooding and landslides.
Much of Okayama sits immediately below mountains, which makes it particularly exposed to devastating landslides following significant rainfall events. Bursting pipes and power outages led over 250,000 homes in the Okayama and Hiroshima Prefectures to go without water for several days after the floods. Landslides destroyed homes and exacerbated infrastructure damage caused by flooding.
Many business operations were severely impacted by these events as well, and some facilities remain closed. Companies such as Panasonic experienced physical damage due to flooded facilities, and others were impacted by damaged infrastructure and communities, impacting their supply chains and workforce.
Okayama and Hiroshima are centers of economic activity for a number of key sectors in Japan, hosting production facilities for auto manufacturing, consumer electronics, retail trade and others. The figure below highlights the concentration of facilities of companies in the auto manufacturing industry by the sector of their operations. Companies that rely heavily on manufacturing operations are particularly vulnerable to flooding due in part to their utilization of expensive equipment that can easily incur water damage.
The heavy rainfalls showed no favorites in their disruption of manufacturing facilities across industries. For example, Mitsubishi and Mazda halted operations at some factories during the storms, due in part to supply chain disruptions. Many companies were also forced to pause operations because employees couldn’t get to work. While Mazda’s headquarters in Hiroshima Prefecture and a production facility in Yamaguchi Prefecture weren’t damaged themselves, they remained closed after the storms until employees could return to work safely. Likewise IHI Corp. closed its No. 2 Kure factory in Hiroshima because of water shortages and employees’ commute challenges.
The extent of long-term economic impacts that these companies will bear in the aftermath of last week’s storms is not yet known, but merits ongoing examination as the region recovers. Understanding the location of a corporation’s facilities and their exposure to extreme weather events is a key starting point for gauging exposure, and therefore can be instrumental in understanding company’s future performance.
SustainabilityDefined is the podcast that seeks to define sustainability, one concept (and bad joke) at a time. Hosted by Jay Siegel and Scott Breen. Each episode focuses on a single topic that helps push sustainability forward. They explain each topic with the help of an experienced pro.
CEO Emilie Mazzacurati joins the show for Episode 14 to discuss supply chain risk, leading with the dire news that the world may run out of coffee and chocolate by 2050! How is that possible, you ask? Emilie helps Jay, Scott, and their listeners understand why supply chains are so critical to delivering the goods we love, and how understanding the effects of climate change could help us avert a world without coffee and chocolate. Click the audio player above to listen in!
Four Twenty Seven CEO Emilie Mazzacurati discusses how the private sector is responding to climate change risks and highlights opportunities for local governments to engage with local businesses on climate resilience in this audio recording from a panel on The Economic Impacts of Climate Change at the 2016 California Adaptation Forum.
Follow along with Emilie’s talk in the slides below.
Climate risk is high on the corporate agenda, but most corporations and investors are yet to to incorporate climate change into their enterprise risk management and strategic processes.
Our research shows critical climate impacts can be efficiently identified thanks to our proprietary hotspot screening methodology. Quantifying risk is essential to business resilience, and showing a good command of climate risk in financial disclosure is critical to keeping investor confidence.
Business leaders know they can stay ahead by leveraging climate data into their business analytics – we’re proud to help them innovate and become more resilient.
Emilie Mazzacurati, Founder and CEO
Climate Change: Global Risk Factor #1
The business communityofficially names climate change as #1 global risk. In the 11th edition of the World Economic Forum’s Global Risk report, “failure of climate change mitigation and adaptation” ranked as the number one global risk for 2016 in terms of impact, and number three in terms of likelihood. Water crises and extreme weather events were also near the top of the list.
In his open letter to CEO’s everywhere Laurence Fink CEO of BlackRock – the world’s largest money manager – articulated the need for long term thinking to be integrated into board room decision making. He noted that ESG impacts like climate change “have real and quantifiable financial impacts.”At Four Twenty Seven we are working to highlight such risks, and help board members and entire organizations make more informed financial and operational decisions.
Quantifying Climate Risk: Tool
Do you know which of your facilities is most exposed to climate change? Are your assets vulnerable to extreme weather events or to sea-level rise? Our Climate Risk Forecasting and Adaptation Strategic Tool is a fast and convenient way to screen your facilities and suppliers, and reduce vulnerability to climate change risk.
Mindy Lubber from Ceres outlines the role climate risk disclosure can play in paving the road towards sustainability and better business outcomes. We are optimistic about the ability of reporting to expand disclosure beyond what Lubber calls “boilerplate and superficial” by providing tangible pathways towards creating resilient operation and supply chains.
View her talk and others from thought leaders working on climate disclosure and financial reporting here.
CDP Global Supply Chain Report
The CDP has released their annual supply chain program report. The report, written with BSR’s support, used data from the supply chain program and combined this with insights from both organizations’ work with members to understand and address climate change.
Of the 4,005 global suppliers surveyed by the CDP most of whom recognize the climate risks they face: 72% identified regulatory, physical, and/or a wide range of other climate-related risks, and most of those (64%) specifically highlighted their regulatory risks.
Climate Change at the top of 2015 Insurance Claims
Insurers paid out around $27 billion for natural disaster claims last year with weather causing 94 percent of incidents, underscoring the challenge posed by climate change, data from reinsurer Munich Re showed. (Reuters)
What We Are Reading: SASB on Climate Risk
The Sustainable Accounting Standards Board has just released its new Technical Bulletin on Climate Risk. This report highlights the findings that have surfaced from SASB’s work, offering a big-picture view of how and where climate risk is present. SASB research demonstrates that $27.5 trillion, or 93 percent of U.S. equitiesare exposed to the systemic nature of climate risk.
Next week! Climate Leadership Conference
Emilie will be presenting on The Cost of Inaction and Making the Business Case for Investing in Resilience at the 2016 Climate Leadership Conference on Wednesday, March 9th, 2016.
Now in its fifth year, the CLC is organized by the Center for Climate and Energy Solutions (C2ES) and The Climate Registry (TCR), with the U.S. Environmental Protection Agency as the event’s headline sponsor.
The atmosphere in Paris mid-way through the negotiations is cautiously optimistic. While most of the hard lifting is yet to be done, negotiators and observers seem reasonably satisfied with how far along things are. In this hopeful context, we are proud to contribute an exciting new report on The Business Case for Responsible Corporate Adaptation, written for Caring for Climate. We hope you find inspiring examples of how business can be part of the solution, and useful guidance for policymakers to support community-minded corporate adaptation.
Emilie Mazzacurati, Founder and CEO
COP21: The Business Case for Responsible Corporate Adaptation
COP21: New Task Force on Climate-related Financial Disclosures
The Financial Stability Board (FSB) announced on December 4th it was establishing an industry-led disclosure task force on climate-related financial risks under the chairmanship of Michael R. Bloomberg. The Task Force on Climate-related Financial Disclosures (TCFD) will develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to lenders, insurers, investors and other stakeholders.
This important industry development will help provide guidelines and benchmarking for companies. The transition to a carbon-free, resilient economy may bring costs for fossil fuel industry and businesses in vulnerable locations. Early risk identification, disclosure and resilience planning make all the difference – read more on how we can help.
Audiocast: Nik Steinberg on What’s at Risk? Capturing The Costs of Climate for Business.
Climate change presents real challenges and costs for business operations. Both large and small organizations are susceptible to liability costs and direct disruption of their operations from extreme weather, rising global temperatures, and other climate change impacts. Solutions do exist to help monetize and develop adaptation and resilience strategies that can protect the bottom line.
Nik spoke at the 2015 Industrial Environmental Association about how Four Twenty Seven is working to help business and industry understand the costs of their exposure to climate risk.
Do Federal Agencies Address Climate Risk in the Supply Chain?
How do Federal Agencies incorporate the risks of climate change into their organizations? Its a question that has been raised by the Obama administration through executive order Executive Order 13653.
Our summary highlights key findings from the General Accountability Office (GAO) report on how federal agencies are identifying, evaluating and addressing the impacts of climate change on their supply chains and suppliers. Read more about barriers and the state of play in the federal government, and lean more on how Four Twenty Seven can help you identify hotspots in your supply chain.
Higher Temperatures to Reduce Economic Income
A new study published in Nature by Stanford and UC Berkeley shows the impacts of temperature changes on the global economy. The report found that “If future adaptation mimics past adaptation, unmitigated warming is expected to reshape the global economy by reducing average global incomes roughly 23 percent by 2100 and widening global income inequality, relative to scenarios without climate change.”
Meet the Team: Colin Shaw
Colin Shaw, MDP (2016)
Colin joined the Four Twenty Seven team in May 2015 while pursuing a Master’s degree in Sustainable Economic Development at the University of California, Berkeley. Previously, Colin spent 8 years in Transaction Services at Pricewaterhouse Coopers, working on over 200 mergers and acquisitions ranging in size from $5 million to $40 billion in enterprise value.Motivated by a growing awareness of the global threats of climate change, Colin decided in 2014 to apply his extensive private sector experience and actuarial background toward climate change risk measurement, risk mitigation, and adaptation efforts.
The United States Government Accountability Office (GAO) recently released a report on how federal agencies are identifying, evaluating and addressing the impacts of climate change on their supply chains and suppliers.
Current efforts to build resilience in federal agencies
The report set out to identify the key challenges facing 24 surveyed federal agencies who where responsible for 98 percent of procurement budgets in 2013-2014. The agencies included the Department of Defense, the Department of Homeland Security, and NASA. The report was prompted by a question from Congress.
The report surveys how and whether federal agencies have planned for climate change disruptions in their adaptation plans. Indeed, in November 2013, Executive Order 13653 established a directive to these organizations to build adaptation and resilience measures into their organization: “In doing so, agencies should promote:
(1) Engagement and strong partnerships and information sharing at all levels of government;
(2) Risk-informed decision-making and the tools to facilitate it;
(3) Adaptive learning, in which experiences serve as opportunities to inform and adjust future actions; and
(4) Preparedness planning.
Few agencies are planning for climate risk in the supply chain
The report found 25 percent of agencies surveyed did not include climate risk to the agency’s supply chain, and most agencies had only included some information – general or agency-specific risks. Only three agencies had gone as far as identifying potential agency-specific actions, and one had a long term plan and strategy to address those risks.
Knowledge gaps and lack of tools are the biggest barriers
The report outlined some of the barriers to action on building resilience, citing hurdles such as planning timelines not aligning with federal budget cycles, a lack of institutional knowledge on best practices for assessing risk, and a lack of cross agency coordination to integrate adaptation strategies into shared supply chains.
It also identified information asymmetries about how adaptation success is measured as a hurdle for federal agencies. Of the 24 federal agencies surveyed, only four identified agency specific actions around building supply chain resilience. One in 24 had gone as far as mentioning budget needs to achieve their goals, and seven out of 24 did not attempt to identify the risks of climate change on their supply chains, feeling intimidated by “a lack of defined best practice.”
Getting over the barriers
Supply chains raise complex issues for organizations trying to prepare for climate change. The lack of visibility of supplier location and vulnerability make it difficult to fully assess risks, let alone identify effective measures to address and prevent or mitigate those risks.
At Four Twenty Seven, we have created tools to help large organizations in the government and private sector identify hotspots and quantify climate risk exposure in their supply chain. Learn how we can help your organization map risk across commodities and suppliers and build resilience into your organizational framework.
Climate change presents real challenges and costs for business operations. Both large and small organizations are susceptible to liability costs and direct disruption of their operations from extreme weather, rising global temperatures, and the climate change.
Solutions do exist to help monetize and prioritize adaptation and resilience strategies that can protect the bottom line.
Nik spoke at the 2015 Industrial Environmental Association about how Four Twenty Seven is working to help business and industry understand the costs of exposure to a changing climate.
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.
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.
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.