Report templatetiba.co.tz/wp-content/downloads/Climate Change and The... · PPT file · Web view2015-10-27 · ©2015 KPMG Kenya, a ... Bernard Kiore. Senior Advisor – Risk Consulting

Climate Change and Its Effect on the Financial Sector

“Our world has entered an era of unprecedented environmental and social challenges. This creates the need to develop economies that are more sustainable and, at the same time, more profitable and competitive”

October 2015

©2015 KPMG Kenya, a Kenyan partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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This presentation is made by KPMG Kenya, a member firm of the KPMG network of independent firms affiliated with KPMG International, a Swiss cooperative. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.This presentation has been prepared solely and exclusively for the benefit, information and use by the participants of Tanzania Insurance Brokers Association Conference and for the sole and exclusive purposes of communicating material related to the conference. These slides cannot be used by the participants of the conference for any purposes other than as expressly stated herein; neither can these slides be disclosed to, referred to, or used by, any other third party. KPMG accepts no liability or responsibility whatsoever, resulting directly or indirectly from the disclosure of the presentation contents to any third party and/or the reliance of any third party on the contents of the presentation, either in whole or in part, and the participants of the workshop agrees to indemnify KPMG in this respect.

Disclaimer


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Contents

02 Climate change and the financial sector

Sustainability megaforces03

Value at stake and adaptation04Climate change threats and opportunities in the financial sector05

Introduction01

1 Introduction


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Is a change in global or regional climate patterns.in particular a change apparent from the mid to late 20th century onwards and attributed largely to the increased levels of atmospheric carbon dioxide produced by the use of fossil fuels.Oxford Dictionary.

Climate change……

Climate change- Definition

"Climate change" means a change of climate which isattributed directly or indirectly to human activity thatalters the composition of the global atmosphere and whichis in addition to natural climate variability observedover comparable time periods. -United Nations


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Drivers of Climate Change

The two drivers of climate change are:

Human Activities Natural Processes


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Some of these natural processes include:Energy output from the sun

Variation in the earth’s orbit and the orientation of its axis

The greenhouse effect of water vapour and other trace gases

1

2

3

4 Volcanic and meteorite activity and plate tectonics


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Human activity

DeforestationBurning fossil fuels

Waste breakdown &

landfillIndustrial Activities

Farming


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Impacts of Climate Change on Natural Resources

1. Reduction of forests and vegetation cover due to drought, forest fires, pests and invasive species present additional stressors to forests

2. Loss of biodiversity due to negative changes in the habitats of native and endangered plant and animal species

3. Scarcity of water available for industrial use, renewable energy production and waterways due to insufficient rainfall

4. Excessive water supply leading to frequent flooding, land erosion, shoreline damage and decreased water quality due to increased runoff and debris

5. Unavailability of fish and wildlife due to harsh environmental conditions

6. Drying up of rivers and wetlands leading to droughts and shifting of plants and animals

2 Climate change & the financial sector


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Impacts of Climate Change on the Financial Sector

1. Economic costs of climate change - At a mean global temperature increase of 3°C, conservative assumptions imply moderate economic costs rising to 3% of global GDP annually

2. Shifts in political frameworks - International and national political frameworks to combat climate change have been put in place

3. Shifts in investors’ awareness - Investors are becoming more concerned about climate change and corporate responses to it

4. Macroeconomic impacts such as the expected reduction in productivity and economic growth reducing per capita incomes

5. Direct physical impacts of climate change such as floods and storms affecting assets and investments

6. Indirect and knock-on effects of climate change i.e. adverse weather resulting in a change of the credit worthiness or solvency of clients


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Role of Financial Sector in Climate Change

1. The financial sector presides over a large pool of capital, more of which should be steered towards low carbon, climate resilient activities

2. Capital and investment flows in the financial sector need to shift from high to low carbon activities

3. Financial sector needs to manage risks and capture new opportunities arising from climate change since climate change is a systemic activity impacting all the sectors of the global economy

4. The financial market system must be effective so as to that financial markets can respond better to managing systemic risks such as climate change

3 Sustainability Megaforces


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Global Sustainability Mega forces

• There is a set of ten global sustainability mega forces that will impact every business over the next two decades

• The mega forces were identified based on quality numerical projections, key pressures causing global environmental and social problems and the most significant consequences of those pressures for natural and human security

• The mega forces do not function in isolation from each other but act as a complex and unpredictable system, feeding, amplifying or ameliorating the effects of others

• Business leaders seeking to manage the risks and harness the opportunities of the future must understand how these megaforces function and how they might affect their own organizations


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Global Sustainability Mega-forces

Water ScarcityClimate Change Population Growth

Food Security

Material Resource ScarcityUrbanization Wealth Ecosystem Decline

Energy & Fuel Deforestation


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Climate Change

• It is the one global mega force that directly impacts all other global mega forces

• Predictions of annual output losses from climate change range between 1% per year, if strong and early action is taken, to at least 5% a year if policymakers fail to act.

• There are six key types of risk to businesses from climate change:

Physical Risk Social risk

Regulatory Risk Litigation Risk

Reputational Risk

Competitive Risk


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Interaction of Global Sustainability Mega forces

The global sustainability mega forces while significant individually, they are also closely interwoven with each other. A few examples of this include:

1 Population Growth and Wealth increase Energy use which drives Climate Change

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3

4

Climate Change increases Water Scarcity and Food insecurity which combine to drive Urbanization as more people head for cities to escape deprivation

Climate Change and Material Resource Scarcity drive Deforestation which in turn causes Ecosystem Decline

Deforestation circles back to drive Climate Change as there are fewer trees to absorb carbon in the atmosphere

Value at Stake and Adaptation4


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Mega forces impacts by Sector

• KPMG performed a quantitative and qualitative review of the business risks and opportunities facing key sectors of the economy in line with the Industry Classification Benchmark (ICB) system

• The following industry sectors facing the greatest risks from global sustainability mega forces and have the potential to harness the greatest opportunities were identified:

SectorsAirlines Industrial Metals & Mining

Automobiles Mining

Beverages Marine Transportation

Chemicals Oil & Gas

Electricity Telecommunications & InternetFood Producers


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Environmental Intensity - A Clearer Picture

The findings of the KPMG review are:• Industrial Metals has achieved the greatest improvement of

the 11 sectors in terms of its environmental intensity, however the sector’s significant growth in earnings over the period helped it to gain this position

• Mining has achieved a similar improvement in its environmental intensity but has also recorded the largest increase of all 11 sectors in its external environmental costs

• A cluster of sectors – Automobiles, Chemicals and Electricity – have improved their environmental intensity while also achieving negative or low growth in the external environmental costs they incur. This suggests that these three sectors are coming the closest to decoupling their economic growth from environmental impact

• Food Producers and Beverages have shown the lowest rates of environmental intensity improvement. Food Producers is the only one of the 11 sectors that, according to the data, has not improved its environmental intensity at all over the last eight years


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Demonstrating the Value at Stake

Profits LostThe findings of the KPMG review are:• External environmental costs could account for a considerable

proportion of earnings (EBITDA) and thus represent significant business value potentially at stake: across the 11 sectors, the average external environmental costs per dollar of earnings would have been approximately 41 cents in 2010

• According to the data, Food Producers had the largest external environmental cost footprint of the 11 sectors in 2010 at US$200 billion, followed by Electricity at US$195 billion and Oil & Gas at US$152 billion

• External environmental costs of the Food Producers could outweigh the sector’s entire earnings. For five other sectors (Electricity, Industrial Metals, Mining, Marine Transportation and Airlines) environmental costs could account for more than half of earnings


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What is adaptation…• Adaptation refers to activities that reduce harm or risk of

harm, or realize benefits associated with climate variability and climate change

• The physical risks of climate change and their consequences, pose immediate and long-term threats to operations

Adapting to Climate Change


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Qualitative Review-Adaptation Finance & Investing

• There is a growing need to support adaption measures, particularly in the poorest countries and communities where the physical risks are high and the capacity to respond insufficient

• According to the World Bank and UNDP, estimates of the annual adaptation costs in developing countries alone range from $9-41 Billion and up to $86 Billion respectively

• The financial sector’s involvement in adaptation finance is currently very small with most involvement from development aid from UNFCCC

• The link between development aid and adaptation financing often makes the involvement and role of the private sector more complex

• Insurance has a key role to play in assisting industry adapt and respond to climate change risk


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The enabling factors for the financial sector to get involved with adaptation finance and investing include:

Modelling capabilities

• Catastrophe risk capability

Financial engineering skills

Better and more accurate climate information and services

• International Financial institutions, government , insurance and financial sector partnership

• Weather index technology?

• Weather risk products


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Main ways the financial sector can get involved with adaptation finance and investing include:1. Insurance and reinsurance companies providing insurance

solutions to help communities manage climate change related risks (We shall discuss potential threats and opportunities that the insurance industry can realize)

(This is already happening)2. Infrastructure spending projects on adaptation to insure

against climate change and to help societies adapt3. Sensitization on insurable risks emanating from climate

change

Climate Change Threats and Opportunities

4


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General Insurance

• Potential Threats New and existing markets become unviable as climate

change increases regional exposure

Asset management risks; loss of long-term value in

securities affected by adaptation/mitigation regulations

and measures

Compounding risk across entire portfolio of converging

activities (asset management, insurance, reinsurance)


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General Insurance

• Potential Opportunities

Use of pre-existing insurance tools (e.g. Errors and

Omissions insurance to protect against errors in

forward selling of climate-influenced contracts;

Business Interruption insurance to be better prepared

than competitors)

Technology insurance and/or contingent capital

solutions to guard against nonperformance of clean

energy technologies due to engineering failure


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Property / Casualty Insurance

• Potential Threats

Physical damage to insured property from

extreme/more frequent weather events unbalancing

insurer’s assets and liabilities

Liquidity problems due to same

Increases in population and infrastructure densities

multiply size of maximum potential losses from extreme

weather events

Regulatory change, for example relating to design

standards


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Property / Casualty Insurance


Increase in demand for underwriting services as

weather risk increases

Insurance of GHG offset and clean energy projects and

related financial services e.g. professional indemnity for

carbon credit guarantors and certifiers


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Life insurance


Increased risks to human health (thermal stress, vector-

borne disease, natural disasters)


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Life insurance


Increase in global demand for L/H insurance as human

health risk increases


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Other


Business interruption risks becoming unpredictable and

more financially relevant

Disruptions to construction/transportations sectors

Increased losses in agro-insurance

Political/regulatory risks surrounding mitigation


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Other


Collaboration with others in pooling capital to expedite Kyoto

mechanisms

Microinsurance

Weather derivatives

CAT Bonds

Consulting/advisory services


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07Co

mm

entQuestions

Addition

© 2015 KPMG Kenya, a Kenyan partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

Contact us

KPMG Kenya 8th Floor, ABC Towers Waiyaki WayP O Box 40612, 00100 GPONairobi, Kenya

Tel: 254 (20) 280 6000 254 729 110 597Fax: 254 (20) 221 5695

www.kpmg.com

Contact us

David LeahyPartner – Risk ConsultingT 254 20 280 6191E [email protected]

Bernard KioreSenior Advisor – Risk ConsultingT +254 20 280 6137E [email protected]

http://www.kpmg.com/

mailto:[email protected]

mailto:[email protected]

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Report templatetiba.co.tz/wp-content/downloads/Climate Change and The... · PPT file · Web view2015-10-27 · ©2015 KPMG Kenya, a ... Bernard Kiore. Senior Advisor – Risk Consulting