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One of the greatest challenges of the coming decade

24 March 2020 Myra Knoesen

As recently as ten years ago, the environment did not register in the top risks for discussion. Recently, however, it dominated at the top of the Davos 2020 agenda.

“Climate change is striking harder and more rapidly than many expected. The last five years are on track to be the warmest on record, natural disasters are becoming more intense and more frequent, and last year witnessed unprecedented extreme weather throughout the world. Global temperatures are on track to increase by at least 3°C towards the end of the century—twice what climate experts have warned is the limit to avoid the most severe economic, social and environmental consequences,” said Gert Wahl, Client and Markets Officer, Client Advisory Services at Marsh Africa.

“The United Nations has warned that countries have veered off course when it comes to meeting their commitments under the Paris Agreement on climate change. Worldwide economic stress and damage from natural disasters in 2018 totaled US$165 billion, and 50% of that total was uninsured,” added Wahl. 

“Four years after the United Nations’ momentous Paris Agreement – the target of which is to keep the increase in global average temperatures to well below 2°C above pre-industrial levels, and to try to limit the rise to 1.5°C – it has become clear that the progress and policies on emission reductions has, so far, been insufficient,” said Bonnet. 

Overall, Allianz has estimated that responding to the challenges posed by climate change could cost companies worldwide as much as $2.5 trillion over the next 10 years, with the cost of making the energy sector “greener” the highest. 

Risks associated with climate change

According to the Allianz Risk Barometer, an increase in physical losses from more severe weather events is the exposure businesses fear most as rising seas, drier droughts, fiercer storms and massive flooding pose threats to factories and other corporate assets, as well as transport and energy links that tie supply chains together. 

“Further, businesses are concerned about operational impacts, such as relocation of facilities, and potential market and regulatory impacts. Companies may have to prepare for more litigation in future. Companies are realizing that they may face consumer criticism, reputational damage and increasing regulatory and legal action if they don’t adequately address climate change in their business strategy, operations and product offerings. It is not just governments and regulators who are putting pressure on companies about how they are responding to climate change. Climate-linked activism against corporates is a developing trend and boards are increasingly being challenged by investors and other stakeholders,” said Bonnet. 

“Risk managers and insurers should consider new and more data, new technology and 4th industrial revolution enabled solutions to respond to climate change risks such as: wildfire risk, health risks and loss of life, flood risks and agricultural risks,” said Wahl. 

“South Africa is not immune to the devastation of climate change and severe weather conditions. Closer to home, the Western Cape wildfires and drought place increased pressure on homeowners to ensure their risks are well-protected and for us, as business partners, to consider how best we can service the needs of our clients around the country who face similar and extreme weather conditions,” added Loots. 

What this means for insurers

“As risk-carriers, insurers have skin in the game. And the climate crisis is already impacting our business. 2017, for example, was a year of particularly significant catastrophes. Houston experienced its third 500-year flood in less than four decades, while California suffered five of its 20 most destructive wildfires ever. Meanwhile, 41 million people in Bangladesh, India and Nepal were affected by flooding and monsoon rains,” said Bonnet.

 

“The climate and extreme weather conditions have a systemic impact on our country, we need to apply a systems thinking approach to how we solve this challenge as an industry and that is where powerful tools like Theory U and PDIA (problem driven iterative adaptation) become critical business tools as we explore the ways and means to support the United Nation’s 2030 Agenda, the 17 Sustainable Development Goals. The science and evidence show that if we continue on this trajectory what we face is the risk and impact that businesses will cease to exist, economies will be negatively impacted, and future generations will struggle to thrive within these conditions,” said Michelle Ashen, MUA’s CPD content producer and marketing manager. 

“Insurers will need to adopt underwriting models leveraging the latest technologies which can accurately forecast risk exposures to the changing environment and look at addressing insurance coverage of environmental risk to reduce underinsurance,” added Wahl. 

The key to resilience

“We have been forewarned about the rise in weather events due to climate change. South Africa has had to pay serious attention to not only improving, but fast-tracking disaster services and management processes, rolling out a national and regional programme. South Africa has released its National Climate Change Bill which is expected to be passed into law in the near future. This is a response to our participation as a country in the UN and G20 as a global movement against climate change and building a climate-resilient society and economy. The Bill focusses on three key aspects which include the provinces and municipalities response to climate change; national adaptation to impacts of climate change and greenhouse gas emissions and removals,” said Loots. 

“If sectors do not prepare and take action now, in a structured way, they will face increasing regulatory and governmental pressure which will force them into a belated transition over a very short term period. Measures will include carbon pricing, energy and efficiency mandates, mobility regulations and industry-specific taxes, fines and levies. Companies, therefore, have to address transition risks and start de-carbonizing their business models. The key to resilience is to reduce emissions and adapt to inevitable levels of climate change,” added Bonnet. 

Writer’s Thoughts:
As Bonnet highlights, preparing a company’s business model for a low-carbon future is a multi-departmental approach involving strategy, governance and reporting, risk management and business-facing functions. Every company has to define its role and pace in the climate change. Risk managers need to drive ESG and climate change focus internally to influence decisions. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za.

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