Rising to the challenge of climate change
Doubts have been raised about the impact of gasses produced by human industry, but the evidence now appears to reflect an unmistakable pattern. Data collected by NASA tracks the impact of rising temperatures in a number of key areas:
- Since the late nineteenth century, when the impact of the industrial revolution was first beginning to be felt worldwide, the planet’s surface temperature has risen by around one degree Celsius, with much of this increase occurring in the past 35 years;
- Rising sea and air temperatures have led to shrinking polar ice sheets. NASA reports the Greenland ice sheet losing an average 286 billion tonnes of ice per year from 1993 to 2016 and Antarctica 127 billion tons per year, with the rate of loss tripling in the past decade;
- Rising sea levels are one of the effects of climate change most likely to change how and where we live. These rose by around 20cm during the twentieth century. Since then, the rate of change has doubled - and is accelerating with every passing year;
- Rising temperatures are driving an increase in the frequency of extreme weather events, such as windstorms, intense rainfall events, and droughts.
Public perceptions are changing
After years of relative complacency, there has recently been a significant shift in public opinion. An intense concern about our rapidly changing climate now resonates with an increasingly broad cross-section of human society around the world. From the influence of respected voices like David Attenborough, to Greta Thunberg and radical protest of groups like Extinction rebellion, voices raised in urgent warning are reaching an increasingly wide and receptive audience.
Media coverage of climate-related natural disasters like the recent Australian wildfires are helping to thrust these issues into the mainstream current of national and international debate. The world of business is by no means immune to these changes.
A company’s green credentials are now an important component of the corporate social responsibility mix. Taking heed of climate change lies at the heart of a new wave of so-called ethical capitalism. A reputation for taking a responsible stance on environmental issues is increasingly seen as having measurable value, as we move into an increasingly transparent and connected world. Where ‘brown investments’ like those in oil, gas and coal may have been uncomplicatedly lucrative in the past, they now carry a reputational cost too great to ignore. A climate-hostile investment strategy today entails real financial costs. Green investments represent a socially acceptable alternative, now estimated to total around $11 Trillion worldwide. So, clearly, a shift has begun. Green investments fall broadly into two categories: on the one hand investing directly in wind, solar, tidal or geothermal energy production and on the other ensuring a distributed or ‘climate-proofed’ portfolio. The rationale for the latter approach is that the changing climate will create both physical and economic disruption, for which companies need to prepare.
A changing regulatory landscape
The 2015 Paris Agreement set international targets for reducing carbon emissions. Since then, however, these have been widely neglected or undermined. More than 2,000 pieces of climate-related legislation have been passed, but little has changed, and less has been enforced.
In March 2019 the FCA and PRA set up the Climate Financial Risk Forum (CFRF), a group selected to discuss how climate change may affect financial services and associated industries. To date, discussion has focused on how companies’ environmental impact relates to their size and complexity, with the aim of identifying quantitative measures that can then be recorded and regulated. Historically, the FCA has hosted similar focus groups in preparation for new legislation to ensure industry participants are consulted and informed.
Another initiative that could play a role specifically within the real estate arena, is the Global Real Estate Sustainability Benchmark (GRESB), a recently launched benchmarking system that ‘helps real estate investors demonstrate their commitment to investing responsibly, through a granular view on a core set of sustainable pillars.’ If GRESB is widely adopted as an ‘industry standard’ it could also help establish the lower limits for new regulation. Within GRESB’s multiple assessments, a well-performing portfolio is a defined in terms of energy consumption, greenhouse gas emissions, water consumption and waste. This approach could provide an indication of how regulations on property funds might function as a new aspect of compliance.
Implications for insurers
With knee-deep floods becoming an increasingly common occurrence in many northern cities, and adverse weather warnings cropping up more and more often, the effects of global warming are not hard to spot here in the UK. Extreme weather and flooding are just two items on a long list of environmentally-influenced hazards with the potential to damage or destroy properties.
If the pace of climate change continues on its present trajectory, it seems probable that the insurance sector as it is currently constituted will struggle to extend property insurance cover to all those who need it. Flood RE could turn out to be an early example of future collaborations between insurers and governments in the face of risks the market alone cannot comfortably handle. The flood risk to many parts of the UK already falls well inside the not-whether-but-when zone. It seems almost inevitable that insurance premiums will be forced up in response to other effects of climate change in the UK.
At Lockton we continue to play a proactive role in identifying key challenges around climate change to protect our clients against future changes in law or insurer attitudes. We continue actively reviewing innovative products, services and technologies that can help us achieve this drawing on our own expertise and on information gathered through our forward-looking focus groups - we continue doing everything we can to ensure our clients have access to the insurance protection they need.