The dawning reality of physical climate risks in emerging economies

In August this year complaints were filed with the London based Financial Conduct Authority, the action was taken by a non-profit environmental group ClientEarth which accuses three UK insurance companies of failing to spell out the dangers of climate change risks faced by their businesses to their shareholders. ClientEarth contend that the insurers face physical climate risks as the assets they insure will be affected by storms, extreme weather and rising sea levels, but they failed to mention these factors in their annual reports.

Insurance firms and bank’s investment portfolios could also be affected as the transition to renewables may well make fossil fuel related investments redundant sooner than thought. This action by ClientEarth is one of the first warning shots in the battle to get often short sighted companies to take climate change risk seriously.

As the reality of climate change hits home, communities in many parts of the world are already being forced to adapt to new conditions, but the failure of governments to transition to a sustainable economy means that in time catastrophic damage to the physical environment will hit society, business and people hard. A cruel irony means that emerging economies look set to be affected most by this breakdown despite contributing least to climate change.

Rising Temperatures

Even seemingly small increases in temperature will impact the world, for example a “modest” 1.5 Celsius increase in temperatures will reduce fresh water in the Mediterranean region by 10 % or so dramatically cutting agricultural yields. A 2 Celsius increase would dramatically reduce wheat and soy crops, destroying livelhoods and food chains, heatwaves will last a third longer and rainstorms will increase in intensity.

Climate change and its physical impacts are only now starting to be truly appreciated, recent record high temperatures across the globe have hammered home the fact that countries and businesses are ill prepared for the changes about to come.

While it is difficult to pinpoint exactly what will happen there are some clear trends which will occur and companies can start to prepare and adapt and consider these risks.

The impact of rising heat levels

Some regions could become in effect uninhabitable as soaring temperatures make ordinary life impossible, record high temperatures in many Asian cities led to the deaths of many vulnerable people in 2018 and made many others effectively housebound as exposure to these day time temperatures of 45 celsius or more would rapidly result in heat exhaustion. In other cases buildings and infrastructure will have to be adapted to withstand new extremes, equipment may not operate in certain cases, vulnerable people may need special measures to make life bearable such as air conditioning and mass cooling systems.

Rising sea levels

Thanks to melting icecaps and expansion through heating sea levels will rise dramatically this century and as it becomes obvious that certain cities are threatened, insurance will become ever more difficult to obtain and many coastal communities could become deserted well before being overcome by the sea.

Rise in extreme weather events

Climate change is expected to result in more extreme weather hurricanes, storms and even earthquakes could increase in number and ferocity as increased heat increases . The costs both in terms of human life and economic are immense, natural disasters cost insurers over US$ 140 billion, a figure only expected to rise as climate breakdown drives extreme weather events.

Increasing Water Stress

As the earth becomes hotter it will also in many regions become dryer, this will lead to increased pressures on water supplies, a lack of fresh water will impact agriculture, industry and for many regions every day life for many people who will face more frequent water shortages. Water shortages will also exacerbate conflicts over fresh water such as between Egypt and its southern neighbours Sudan and Ethiopia over the Nile.

Second Order Risks

Second order risks are wider and include eco-system collapse, migration, change of trade routes, increase in the incidence of vector borne diseases, these are even more difficult to measure and predict accurately, but will all have serious reprecussions for business and society.

Is is possible to measure these risks?

A new report by the Task Force on Climate-related Financial Disclosures (TCFD),  recommends that companies should consider the impact of physical climate risk, but as the report discusses there is still much work to be done on how to measure these risks.

The planning horizons of major companies and banks is typically only 2 or 3 years ahead, while physical climate risks are still perceived as taking years to materialise. This begs the question that perhaps these risks are too far off and unmeasurable to be concerned about, but that would be a mistake.

Physical climate risks are going to hit home much sooner than most realise, homes in flood affected areas could become untenable in terms of insurance, crashing regional property markets, a lack of snow in a region could wipe out skiing based destinations, ocean acidification could destroy fisheries worldwide and agricultural sectors could be severely curtailed or wiped out by climate breakdown.

Ultimately capitalism depends on a belief that economies will continue to grow, and companies flourish, even if some disappear others will take their place, this belief is essential otherwise firms would not invest in the future. Climate breakdown challenges that belief, making it clear that profound changes are underway which will transform the environment in a devasting manner, which is why so many firms are currently doing very little to monitor or report on these risks.

Act now

The good news is that companies acting now will best be able to adapt to and even take advantage of a changing environment such as investing in water efficient irrigation, or changing crop production to plants better suited to higher temperatures or for other industries moving assets away from regions afflicted by extreme weather.

But time is running out the longer companies ignore the risks of climate change, the more likely it is they will be caught out by a changing environment and face major losses as a result.

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