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Climate change – the most significant emerging risks facing the world today

30 May

Climate change

Climate change—often referred to as “global warming”—is one of the most significant emerging risks facing the world today, presenting tremendous challenges to the environment, to the world economy, and to individual businesses. It is also one of the most difficult risks to mitigate. This is a complex global issue at the intersection of science, risk, and public policy.

Ceres which directs the Investor Network on Climate Risk, a group of 78 institutional investors from the U.S., Europe, and Canada who collectively manage over $7 trillion in assets. In an annual report has noted that, despite the financial crisis, a growing number of political, financial and business leaders are calling for immediate action to drastically reduce global warming pollution. Climate change related catastrophic losses in 2008 to the economy were the third highest ever , exceeding $200 billion globally in 2008, including $40 billion in losses from Hurricanes Ike and Gustav in the U.S. alone, according to global insurer Munich Re. Climate trends are creating risks on both sides of the insurance house—underwriting and investment. But these trends also create vast opportunities, from product innovation to investment alpha, for insurers to be part of the global warming solution. For the first time, fighting climate change is seen not just as a long-term imperative but also as a short-term stimulus for a struggling economy. Property insurance companies are driving the majority of the activity (home owner, commercial, and auto)For the first time, two insurers, Zurich and Liberty Mutual, have introduced directors and officers’ coverage specifically tailored to address liability risks associated with climate change.

◆ Almost all of the climate-related innovations in liability insurance for directors and officers, political risk, professional liability, and environmental liability have appeared in the past year. Both Zurich and Liberty Mutual launched products specifically designed to cover boards of directors in the event of climate change litigation, a significant development given pending lawsuits that could allocate significant costs to major emitters of greenhouse gases.

The business risks from climate change include:
• the strong threat of increasingly volatile weather conditions,
• rising sea levels, and new health impacts;
• resulting impacts on insurance markets, business resources,
• personnel, and corporate preparedness;
• increasing legal and regulatory pressures; and
• mounting public and shareholder activism.

Therefore Climate change—and how to respond to it—is not “yet another” issue for insurers. It is, rather, bound up in the very fabric of the industry and its business environment, namely:
◆ Loss-model accuracy
Regulation
◆ Balance sheet strength, risk-based capital, and solvency
◆ Competitiveness
Emerging markets
◆ Reputation & trust
◆ Customer retention
◆Corporate governance, investor relations, and disclosure

Litigation Risks from climate change include:
With a growing perception among the public, government officials, and businesses that climate change causes damage, the likelihood increases that lawsuits may be filed against those believed to contribute to the buildup of GHGs. Companies could find themselves embroiled in courtroom battles on a number of fronts.

Reputation Risks:
Health risks: Climate change also poses a threat through potential impacts on the spread of diseases. A recent study by Harvard Medical School, for example, concluded that rising temperatures and extreme weather affect the breeding and spread of disease vectors such as mosquitoes that carry malaria and ticks that carry Lyme disease. Rising temperatures may also increase the growth of ragweed pollen and cause a rise in the incidence of asthma, according to the 2005 study. Air pollution could also worsen in some areas, with a related rise in respiratory illnesses. The economic consequences in terms of cost to company and government health plans could be significant.
Although most consumers do not currently consider climate change to be a front-burner issue, it is likely to become a mainstream consumer concern by 2010, according to Brand Value at Risk From Climate Change, a study conducted by the Carbon Trust with Lippincott Mercer, a Marsh sister company. In part, climate change will gain visibility among consumers in the coming years through the impacts of media reports on severe weather, increased regulations, political debate, and an increase in products marketed as climate-friendly. A number of companies from a range of industries are already promoting themselves as environmentally friendly and, specifically, climate change-friendly.

Regulatory Risk from Climate change:
As government agencies and world bodies put regulations in place limiting emissions, enforcement action can be expected against companies found not to be in compliance.
Such companies may then face significant costs from fines or from fighting against the regulations—or against allegations of having violated them—in court.

Risk from Shareholders:
Lawsuits from shareholders could centre on whether a company suffered financially due to a lack of planning for climate risks by directors. For example, it’s conceivable that a power company may choose to do nothing to limit emissions, and then the federal government could pass legislation requiring CO2 limits. Companies that had not prepared for the possibility could find themselves at a disadvantage to competitors that did prepare.

Competitiveness Risks:
A company that manages the above risks—physical, regulatory, shareholder, litigation, and reputation—more effectively than others in its industry may gain a competitive advantage. For example, if a manufacturing firm undertakes a comprehensive effort to reduce its energy consumption, it may significantly reduce energy costs, discover ways to streamline its processes, exceed shareholder expectations, and project a positive environmental image. Many companies are now aggressively developing new products as part of environmentally friendly strategies.

Corporate need to;
• understand and assess their exposures to natural hazards;
• analyze infrastructure damage;
• identify the need for upgrades to buildings and business practices; and
• obtain advice on risk-reduction measures.

Note: The article has been condensed from various prestigious publications & condensed for easy reading.

 

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