Trends in the making? Finance and Climate

In the past week, several trends again are emerging, which to me are clear signals that we are seeing change.

One of these is the continuing list of banks that are going to stop lending to activities and organisations that damage the environment.

The latest bank to join others is the Royal Bank of Scotland, which now is going to stop financing energy and mining projects that cause environmental damage.

This “climate aware lending” is just part of the financial disclosure movement that aims to increase the transparency of climate risks within banks and finance industry but also to start changing the way banks lend to different sectors.

Such restrictions in the area of finance could potentially mean that those sectors where environmentally damaging activities are the core business are going to have to rethink the way they operate.

Climate risk considerations in the finance sector

In the last National Climate Change Adaptation Conference in Australia, we heard for example from one of the Australian banks, NAB, and how they are taking direct actions to reduce their climate risks.

Consideration of climate change and its impacts on business operations is therefore increasingly seen as prudent risk management rather than environmental green washing where everyone needs to get on board if only to promote the business brand.

The recognition that climate change has serious consequences to business operations is also recognised in the Australian insurance industry. One of the major insurers, SunCorp, released its climate change action plan just last month.

This is partly based on the Task Force on Climate-related Financial Disclosures (TCFD). For those not familiar with TCFD, it is a global effort to start basically getting the finance sector climate-ready and aware of the risks and also opportunities how to respond to increases in risk:

The work and recommendations of the Task Force will help companies understand what financial markets want from disclosure in order to measure and respond to climate change risks, and encourage firms to align their disclosures with investors’ needs.

This comes at a time when Europe’s largest asset management company is also recognising climate change as a significant issue but also an opportunity for the industry.

Changes in Maryland and California

Maryland and California have also been in the news this week, with references to a “new normal”.

Elliot City in the state of Maryland received its second 1-in-1000 year rainstorm in two years that engulfed the city.

The Maryland event is by no means simply just due to climate change. If you read the Washington Post article detailing what happened and why, you quickly gather that there are plenty of factors that play into why a city floods: the topography, how its located, how its urban environment has been built, the list goes on.

To have such a rare event to happen twice within the span of two years is however now raising discussion as to how a city should plan for such events but also what does this mean for long-term planning.

In California, as Alice Hill reports, the wildfires of 2017 were the strongest and fiercest that the state has ever seen. Yet, this is likely to be only just the beginning given that climate change is contributing to the conditions for wildfires:

“as compared to 1986, wildfires in the western United States have begun occurring nearly four times more often, burning more than six times the land area, and lasting almost five times as long. Of the twenty most destructive California wildfires since 1932, when the state began keeping records, eleven have occurred in the past ten years—and four of those took place just in 2017”

So calling these events just flukes or dramatic yet single events is probably not feasible. This trend needs clearly observations and as the authors point out, in addition to drought conditions in California, the Wildland-Urban-Interface (settlements built close to fire prone areas) is another factor that is contributing to the losses and damages from these fires.

Yet, prudent risk management calls for more adaptive and flexible strategic planning that includes monitoring of fires and updating fire maps, and having a better understanding how emergency management operations should take place under the “new normal”.

What does this has to do with us? 

These emerging trends might sound like something that are the problems of higher authorities and the finance system.

But in the long-run, any decisions that big firms and in particular re-insurers make in this space, will eventually trickle down to people like you and me.

If the nature of the events that we face changes (e.g. increases in flood frequency, hail damage, bushfires), the insurance and banking sectors will both be significantly impacted as are also disaster management agencies.

But there are also good news.

The climate disclosure movement will hopefully result in more prudent risk management, which is going to be in the end beneficial.

Broader consideration of how particular institutional practices, such as those in disaster management, need changing can also result in innovation and reduced risk.

So perhaps some parts of the “new normal” are actual improvements in how we consider risks and plan better.

 

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