In recent years, awareness of climate risks has risen, with numerous studies illustrating the detrimental impacts of climate change on the natural environment and human society.
However, the world is acting too slowly in dealing with these climate risks, according to Rich Sorkin (pictured), CEO of climate science data firm Jupiter Intelligence.
“Currently, the world overall is repeating the mistakes of the COVID pandemic and the Global Financial Crisis – it is too slow to recognize and respond to enormous and imminent impacts on citizens and corporations,” Sorkin told Corporate Risk and Insurance.
“The private sector today is moving slowly to address climate impacts, with enormous variance among leaders who are slowly driving widespread change in large and complex organizations, and, unfortunately, the majority of companies globally who are just waking up to these challenges.”
According to Sorkin, similar to the Global Financial Crisis of 2007-2008, the global banking sector is the most exposed. According to data, there is a material discount in the value of residential and commercial property transactions in climate-vulnerable locations, with significantly more to come as businesses and homeowners increasingly incorporate climate risk data into their investment decisions.
“The LTV (loan to value) ratios in many transactions are out-of-date and increasingly so,” Sorkin said. “This will cause dislocations in a number of markets, which could lead to disruptions in banks’ collateral value and credit ratios, which will have ripple effects throughout the economy. In the Global Financial Crisis, smart people knew for years that problems were growing – and investors and regulators continued to add fuel to the inevitable fire.”
Furthermore, critical infrastructure worldwide is also exposed to increased violent impacts from flood, wind, and fire. This drives enormous increases in health and safety issues, such as chemical leaks into residential neighborhoods and widespread power outages. These risks can be much better addressed with proactive measures by responsible corporations.
On the other hand, Sorkin warned that over-reliance on insurance in dealing with the effects of climate change can also be detrimental, and that businesses must invest in resilience.
“The widespread belief that insurance addresses all the impacts from climate change is dangerous and wrong,” he said. “The chronic nature of climate change will impact everything from business activity through consumer spending, rippling through the private sector across more dimensions than insurance can or will cover.
“By embracing resiliency strategies, the private sector can position itself as leading climate adaptation throughout society. When private sector companies understand the impacts of climate change, then they can proactively reduce the risk to their assets, especially ones near citizens or causing major impacts on quality of life.”
In order to improve businesses’ response to climate risks, Sorkin said that they must first build internal capacity in understanding climate risks, especially by studying how their portfolio of assets and supply chain is exposed to these risks, and what the potential economic impact will be, using the same ROI based approach, defined time horizons and risk thresholds as is prevalent in all business decision making. Investors are also expecting publicly traded companies to start disclosing this kind of information.
Furthermore, building resiliency isn't solely on the private sector’s shoulders. Due to the wide-reaching effects of climate risks, governments and businesses must work together.
“Many of the decisions companies are making are based on the time horizons, acceptable risk levels, and assumptions of regulatory authorities and shareholders,” Sorkin said. “In particular, the focus on one-year results or a static climate by regulatory authorities in insurance, banking, critical infrastructure, transportation, and other sectors dramatically distorts the incentives for addressing risks in five-, 10- and 30-year time horizons – and often limits the ability of the private sector to invest and successfully address these issues.”
Additionally, industries that are already regulated are usually getting the wrong signals from regulators on climate risk. According to Sorkin, the public sector, which owns and finances a huge share of the assets at risk, such as air and sea ports, roads, and railways, are often laggards relative to the private sector in addressing the risks to these assets.
“A common, fact based view of the impact of climate risk, including time horizons and uncertainty, would make an enormous difference,” he said. “We are currently witnessing the widespread damage that the lack of a common, scientifically-based view, humble in uncertainty but attuned to the dramatic impacts, is having in the global pandemic.”