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Market News

 September 20, 2005
The bottom line of climate change

 Vancouver, Canada (GLOBE-Net) - With eerie foreshadowing, three major reports on the growing financial risks associated with climate change were either issued or underway before Hurricane Katrina caused over $100 billion in damage along the Gulf of Mexico. These reports and Katrina's devastating impacts have heightened awareness of the economic fallout linked to global warming. The grim realities of the financial costs associated with changing weather patterns may spur further government and corporate action to address the consequences of climate change.

The reports - issued by the Association of British Insurers (ABI), global giant Swiss Re, and investment network CERES - come at a time when research has produced a near-consensus among scientists regarding climate change, even though what to do about it remains controversial in some quarters. All three studies predict rapidly rising costs associated with more extreme natural disasters, and all stress the need for financial organizations to create climate change risk programs.

Most scientists will avoid linking climate change as the main cause of hurricanes such as Katrina. But they do agree that higher ocean temperatures do increase the ferocity and frequency of such storms. Hurricanes and other storms are formed over and nurtured by warm areas of the ocean's surface. Even a single degree change can increase a storm's intensity and the potential for greater property damage if they hit settled areas. If temperatures rise according to current trends, the corresponding increase in financial losses over the next century could exceed trillions of dollars.

Many financial organizations are beginning to take notice. The ABI report,Financial Risks of Climate Change, points out that in each of the past 15 years, there have been at least 20 significant weather-related natural catastrophes, while the previous two decades had only three years that severe. Analysis of current data suggests an increase of 6% in average wind speed for hurricanes by 2080. Such an increase, a moderate estimate based on current models, is enough to change a category 4 hurricane into a category 5.

The ABI concludes that risk premiums for insurance could increase by as much as 80% in relative terms by 2080. Worldwide, storm-related costs could increase by $22 billion annually. Drought and flooding, which caused major damage across Europe this year, also would increase with warmer temperatures. Single-event costs, such as for a large hurricane, could reach $150 million, on par with insurance industry estimates for Katrina.

The CERES report, which was begun shortly before Hurricane Katrina, agrees: "if trends persist, the impacts of climate change in the United States ... will inevitably result in more insurance claims and increased costs." The Swiss Re, a leading global reinsurance company, identifies climate change as "one of the most important issues facing the insurance industry today".

Despite this, few North American firms have projected increased losses from the results of climate change. While admittedly it may be difficult for many companies to quantify the potential risk factors of climate events, global resource industries - such as firms engaged in oil or gas production -- know their fortunes can be severely affected by the environment factors, and plan accordingly.

Adapting to change

Reducing greenhouse gas emissions to the pre-industrial levels required to halt or reverse global warming is a near-impossible task. But it is clear that our economies and societies will have to adapt to a changing climate. In some respects, this might prove to be the silver lining in the storm clouds associated with global warming.

Technology that allows adaptation to environmental change will feature prominently in development strategies for the future. Green buildings will become more commonplace, providing extra efficiency and better quality internal environments. Waste, water, and natural resources will need to be managed more efficiently, so recycling and reuse programs will be in high demand.

Large businesses will need to become more efficient in their energy and resource use, while small and medium-sized enterprises will have expanded opportunities to deploy new energy saving technologies in their market areas. Innovation borne of necessity will be the key driver for new products and services providing environmental benefits.

Planning for urban and commercial activities will have to take into account the potential effects of climate change, and adaptation strategies will need to be put into place. All forms of human activities from agriculture to tourism will potentially be affected by the consequences of global warming.

Insurance companies are the leading developers of programs to assign costs to natural disasters -- a natural development, as it is they that bear the brunt of claim-related costs. Some forward looking firms in other industries are beginning to include a climate change component in their long range planning, though for many this is being treated largely as a 'phantom threat' -- a 'might happen' contingency as opposed to a key component of mainstream planning and programming.

This lack of planning was outlined in the recent Carbon Disclosure Project report, which showed that most worldwide companies are not taking serious action to reduce emissions or planning for adverse effects of global warming. The report did note an increase in the number of companies with carbon management programs, a sign that climate change is perhaps entering the executive consciousness.

So while the massive clean up continues in the US Southeast, and plans unfold for the rebuilding of New Orleans, financial institutions across the globe will be examining their policies, practices and the rates they charge for the services provided that could be adversely affected by extreme weather incidents. In the long run, this could prove to be the most telling impact of climate change on the costs of doing business and the way we live our lives.