Following two years of devastating wildfires in California, Wall Street now incorporates a new risk metric when evaluating companies: climate resiliency.
There is a good reason for this. There have been 10 weather and climate disaster events that have caused more than $1 billion in damages since the start of the year, already nearly double the average of 6.3 events for each full year between 1980 and 2018, according to National Centers for Environmental Information.
Insurance claims related to wildfire and hail accounted for $13 billion out of $15 billion in natural disaster–related claims through August, according to Swiss Re.
More than ever, investors, analysts, research firms, and the C-suite are paying attention to how climate issues affect revenue and profits and how companies are addressing these risks.
Climate change sparks new risk models.
Fund managers historically haven’t incorporated environmental attributes in their analysis of a company. However, that is changing rapidly. Following the bankruptcy of a California-based power company due to wildfires, fund managers now put more emphasis on climate risks and the physical locations of property and equipment.
Underwriters are also incorporating new risk models. According to the California Department of Insurance, 10% more insurers refused to renew policies in wildfire-prone areas in California in 2018. Research firms, including S&P Global’s Trucost division, are rolling out more climate risk analytics to help investors assess the specific climate risks facing each company.
Climate risk isn’t new, but change is needed.
Organizations have been disclosing information on their environmental and governance risks for years now – but they’ve been reporting the issues, rather than addressing the underlying problems. Although companies are using risk–assessment frameworks, their focus tends to be only on internal operations, rather than considering the environment in which they operate. Organizations need to consider context, strategy, and culture in assessing environmental and corporate governance risks.
Consider climate change a new category of risk to be managed, along with compliance, strategic, and financial risks. An integrated risk management approach addresses climate–change risks through:
- Identifying and creating a register of both current and emerging climate–change risks
- Creating risk assessments using certain criteria — reputational impacts, speed of onset, persistence and ability to mitigate, and more — to enhance understanding of difficult-to-measure sustainability risks
- Integrating workflows across the organization to mobilize faster mitigation response
- Correlating risks to present a clear picture of risk impact on other parts of the organization
- Assessing suppliers’ risk awareness and resilience to climate change
- Managing corporate governance and the financial risks and opportunities of climate change
Climate change is accelerating, and corporate resilience against these risks will only become more critical in 2020. Be proactive with a risk management strategy that builds climate risks into both strategic and operational planning by giving your organization one view of exposure.
Are you ready to take risk management to a new level? Learn more about the benefits of an IRM approach and how these techniques can address evolving risks associated with climate change.