The Financial
Consequences of Climate Change
UNEP argues that climate change-driven, natural disasters may
wreak havoc across the world's stock markets and financial centers. |
|
|
Losses as a result
of natural disasters appear to be doubling every decade and have
reached one trillion U.S. dollars in the past 15 years. Annual losses,
in the next 10 years, will reach close to $150 billion if current
trends continue. The massive economic losses stemming from the devastating
summertime flooding in central Europe are in line with the kinds
of increasingly severe weather events anticipated by scientists
as a result of human-induced climate change. This year has also
seen a failure of the Monsoon in Asia, dramatic forest fires in
the United States and the onset of another El Niño event
in the Pacific.
Members of the United Nations Environment Programme Finance Initiatives
(UNEP/FI), a unique partnership between UNEP and 295 banks, insurance
and investment companies, argue that climate change-driven, natural
disasters have the potential to wreak havoc across the world’s
stock markets and financial centers.
“The increasing frequency of severe climatic events, threatening
the social stability or coupled with significant social costs, has
the potential to stress insurers, reinsurers and banks to the point
of impaired viability or even insolvency,” says a recently
released report entitled, Climate Change and the Financial Services
Industry. The property market, where loans for houses and buildings
are made over relatively large periods, could be particularly vulnerable
as a result of extreme weather events. Homeowners and companies
with property holdings may find that their insurance coverage is
cancelled at short notice, leaving them highly exposed.
Government action to arrest the problem will inevitably mean a reduction
in emissions of the main sources of greenhouse gases linked with
global warming. This will require cut backs and the more efficient
use of fossil fuels such as coal and oil.
Asset managers, such as pension funds that are slow to appreciate
the climate change threat, may see the value of energy or power
company holdings decline as investors become more aware of the liabilities
linked with carbon intensive industries, the report further concludes.
Yet opportunities are emerging that should allow the financial services
industry to reduce or hedge against the risks and even help curb
emissions of the greenhouse gases linked with the de-stabilization
of the earth’s climate and weather systems.
The report says that the annual market in trading greenhouse gases,
emerging as a result of international agreements to reduce emissions,
could be worth as much as two trillion U.S. dollars by 2012. The
market for clean energy could stand at $1.9 trillion by 2020, according
to some estimates.
Meanwhile the financial services industry, with over $26 trillion
in assets under management, could, if mobilized, “wield significant
influence over future economic development . . . and therefore the
future global greenhouse gas emissions” for the benefit of
itself and society as a whole.
However, a survey of mainstream financial institutions carried out
for the report indicates that most are “unaware of the climate
change issue” or have adopted a “wait-and-see policy.”
These attitudes are due to the prolonged wrangling over the Kyoto
Protocol, the international treaty designed to deal with the threat
of global warming, compounded by practical issues like the lack
of solid information on emissions and delays in finalizing the regulations
of the new greenhouse gas markets. As a result, only a small group
of financial companies are addressing the issue, many of whom are
reinsurers whose businesses are already feeling the economic impact
of rising, weather-related insurance claims.
“This report is a wake-up call for the global financial community,”
notes Klaus Toepfer, UNEP executive director. “It highlights
the real risks and economic perils they are facing as a result of
human-influenced climate change. It also underscores how, given
the financial muscle available to them, these institutions could
move markets and minds to deliver a cleaner, healthier and less
vulnerable world for the benefit of the world economy, for the benefit
of people everywhere.”
The report and its studies, supported by a group of the world’s
biggest banks, insurers and re-insurers, were launched in October
at the Swiss Re Greenhouse Gas conference in Zurich, Switzerland.
The findings were also presented to governments at climate change
negotiations in late October in New Delhi, India.
“In addition to the emitting industry needing to take a carbon-constrained
future into account,” concluded John H. Fitzpatrick, CFO and
member of the executive board of Swiss Re, “the financial services
industry, of which we are a part, also has an obligation to contribute
to the solution of these problems through its own investments and
business expertise. After all, climate change and substantial emissions
reductions—like any other strategic global business challenge—ultimately
becomes a financial issue. The problems associated with environmental
disasters quickly become measured in dollars and cents. Our industry
needs to lead by developing financial solutions and risk mitigation
techniques to assist our clients in achieving global emission reductions.”
The report has drawn up a blueprint for action, designed to galvanize
the financial services industry to address the climate change threat
more directly. The blueprint is also aimed at assisting governments
to create the right conditions for the industry to operate swiftly
and effectively in delivering new climate-related businesses and
markets. Recommendations include:
* Urging insurers and re-insurers to better reflect the risks
from climate-related perils in policies and to develop public/private
partnerships in high-risk areas so that cover can be maintained.
* Commercial banks should fully price risks from climate
change into loan agreements and give incentives to schemes that
encourage energy efficiency or cleaner fuels.
* Asset managers, such as pension funds, should request the
companies in which they invest better information on their carbon
emissions and their exposure to greenhouse gases.
* Accountants, actuaries, analysts, credit rating agencies
and others providing professional services should help corporate
clients to better understand the threats and opportunities of climate
change. Greenhouse gas trading markets need standardized accounting
methods to operate and is thus another area where professional people
and their professional organizations can help.
Meanwhile, governments are urged to adopt a long-term, global plan
to keep greenhouse gases at safe levels. This is vital because the
Kyoto Protocol runs out in 2012 whereas carbon dioxide, methane
and the other greenhouse gases can persist in the atmosphere for
many decades. At home, governments should also take a variety of
actions including a clear commitment on how greenhouse gas reduction
targets will be met alongside economic incentives for investing
in clean energy schemes and clean energy research and development.
Governments are also asked to work with stock market regulators
to help boost understanding of the impacts of global warming on
publicly-listed companies and new offerings.
The report concludes by calling for a major drive to mobilize the
financial sector on this issue and recommends that new financial
techniques and methods are developed to help investors and project
financiers factor in climate change into the valuation of their
assets.
The report, Climate Change and the Financial Services Industry,
is available on-line at www.unepfi.net.
|
