Climate change – just another business risk?

Jane Milne

Climate Change Leader

Association of British Insurers

Business and investment risks• Climate change is a significant and growing source of risk to business performance• Impact will vary according to geography and sector• So investors need to understand how your business is affected and how you are managing these risks• An important part of non-financial reporting, with implications for Directors and Officers who fail to address it

Climate change risks

•Physical risks•Regulatory risks•Litigation risk•Competitiveness risks•Reputational risks

….but there are some opportunities too!

Climate impacts• Global temperatures have

already risen by 0.6°C and are likely to rise further by at least 1.5-2.5°C

• Sea level rises of at least 0.5m expected in UK by 2050-60

• Tropical windstorm effects predicted to increase intensity of storms – damage up by 66-75% in US and Japan

Megacities facing natural hazard risks (50 most economically important global cities)

Natural Hazard High hazard risk

Medium hazard risk

Low hazard risk

Tropical storm 6 2 9

Winter storm 3 6 8

Thunderstorm hailstorm or tornado

0 36 14

Flood 2 21 26

Storm surge 2 9 12

Physical risks

•Will vary according to geography and sector•Coastal and offshore facilities likely to be affected earliest•But don’t forget supply chain (particularly energy) and distribution chain effects….•….and impacts on customer demand patterns

Regulatory risks

• Energy and water standards eg Building Regs, domestic appliances, cars

• Renewable energy targets eg Mandatory Energy target

• Emissions targets eg EU ETS

• Development planning risk

Sectoral exposures to carbon risks – gross (%EBIT exposure)

• Generators – 65-70%

•Logistics companies – 65%

•Building materials – 55%

•Industrial gases – 30%

•Food production – 12%

•Supermarkets – 6%

•Hotels and leisure – 5%

•House building – 4%

Liability risks

• And these exposures could also determine whether the sector/company is targeted in legal action

• To date US EPA has been the main target

Competitiveness risk

• What is the energy intensity of the sector?• Can additional costs be passed through to

customer?• Does innovation overcome disadvantage –

Honda v Ford• Are there global differences – Japan v UK?• Are distribution chains vulnerable?• Does product diversity offer more resilience

– “they don’t use carpets in Barcelona”

Reputational risk

• Energy companies shown how to make a virtue of necessity

• Some sectors much more vulnerable to public censure:

– Airlines – 50% intangible value at risk– Oil, gas, retail, banking, telecomms all at

2-3% at risk - but the retail sector is keen to woo ‘green aware’ customers

Opportunities• New products eg low

energy alternatives, flood guards, water saving devices

• New processes eg carbon sequestration, clean coal

• New services eg insuring hydrogen cars, Green mortgages, climate risk consultancies………

In conclusion:• Climate change is happening – faster than

predicted• Public attitudes are changing rapidly• Both will have significant impacts on

earnings in exposed companies• And longer term (uninsurable) impacts will

hit sectors that do not adapt/manage risks• But there are new opportunities too!• Investors are looking to understand this and

decide the returns the risks require