All Roads Lead to Climate Risk

by Caroline McDonald | December 03, 2012

Lloyd’s, Swiss Re, and others in the insurance industry have been shouting from the rooftops for years: Climate change is a reality and we’d better start dealing with it.

And that’s coming from the conservative insurance industry. Climate change may be a political issue, but when it comes to risk and insurance underwriting, there is only reality.

Man made? Natural occurrence? Doesn’t matter. All roads lead to the same conclusion. Insurers see the numbers and the models. Charts and analysis are the name of the game.

Business needs to put politics aside and focus on the reality underscored most recently by Sandy: black-swan events are becoming more frequent and costing more money in both the public and private sectors.
According to a new report from PricewaterhouseCoopers, “Risk ready: New approaches to environmental and social change,” about 83% of S&P 500 companies report they are integrating climate change into their enterprise risk management processes.

But, says PwC, risk managers are only beginning to understand how to manage climate-related risk and have a long way to go in getting it right. Commonly, there is an inadequate structure in place to allow proactive, enterprise-wide management of such risk.

The report does say that organizations are looking beyond merely prioritizing risks and are taking a closer look at how resilient they can expect to be ­— the extent to which they can bounce back — in the event of disasters like Sandy. In significant part that includes measuring and managing local, external risks involving things like utilities, transportation, health, and natural ecosystems.

Still, too many companies manage environmental and social issues in silos and on short-range time horizons, PwC says. That perpetuates the notion that identifying, mitigating, and governing major risks are the responsibilities of others in the organization. A company’s audit committee needs to identify who is actually responsible, the firm recommends.

Waiting too long to take that step is a notable risk in itself, because the forecast calls for an increasing strain on energy and other systems needed for economic stability over the next couple of decades:

  • Increase in world energy demand by 36% through 2035
  • Food demand to increase 50% by 2030
  • 47% of the global population expected to experience water shortages by 2030

Just in 2012, PwC notes, droughts affected 50% of the United States’ area. Dry conditions helped spark more than 30,000 wildfires on 2.1 million acres of land, curtailing crop yields and other agricultural production. In addition, an 11-mile stretch of the Mississippi River was closed to traffic when the river reached its lowest level in more than 40 years. Businesses either had to move lighter loads or were left stranded until the U.S. Army Corps of Engineers dredged the river’s basin.

And just in case all of that isn’t enough, we’re living in the reality of the Superstorm Sandy cleanup — and will be for quite some time.

If the insurance industry, whose business is risk, is this concerned about climate change, shouldn’t all businesses be alarmed? Denial is no longer an option.