15 June 2020
6 months ago, the global risk everyone was talking about beginning with a 'C' was climate change. Momentum and pressure were building across the globe for people, business and governments to take serious action. Climate change was climbing up firms' risk registers and was something boards were taking more and more seriously.
Covid-19 has halted this momentum in its tracks. The world's focus and energy has been consumed in combating this pandemic and climate change has had to take a distant second place.
However, reduced travel and economic activity under lockdown led to a 17% reduction in global CO2 emissions during April, something not previously thought possible. In the UK alone during April 2020 the use of motor vehicles was down 75%.
Does this give new hope that we could tackle climate change, or will it just become a footnote to the Covid-19 story?
What do these changes mean for climate change risk?
For insurers trying to understand the risk that climate change poses to their business, it is key to understand the level and mix of physical, transition and liability risk the business is exposed to. Each of these risks will change depending on the course of action (or lack of action) taken.
- Return to "normal" - Everyone is so desperate to return to how things were that we just slot back into old habits. Emission levels return to "normal" levels and we continue with slow and steady actions to combat climate change.
- Take action - Governments and businesses take this opportunity to re-evaluate how we live our lives, with climate change a key factor taken into consideration.
Some politicians have started to make positive noises. The transport secretary Grant Shapps said in the daily briefing on 4 June that green transport improvements were being brought forward and the shadow business secretary Ed Miliband is calling for a 'zero-carbon army of young people'.
Businesses are also starting to work out what life after lockdown will look like, for example asking, 'Do I really need to travel for this half an hour meeting?' 'Why am I commuting in every day?'
If we see action being taken it could mean that firms are exposed to higher transition risk than they are currently expecting.
- Things get worse - The threat of a severe economic recession is real. Governments’ focus will be on rebooting the economy quickly in order to restore economic growth, relying on established industries rather than new environmental initiatives, and ultimately pushing emissions up.
This could mean increased physical risk for firms than currently expected if we don't start reducing global temperatures.
So, it remains as important as ever to plan for the impact of climate change on your firm’s future.
In the 'take action' or 'things get worse' scenarios, consider how your firm's exposure to climate change risk will change. Ensure that your public disclosures are up to date and that your climate change risk scenarios encapsulate how things might change due to Covid-19.
If climate change is currently on your backburner, now may be a good time to review this. Covid-19 has taught us just how intricately connected all the big global risks are. So, let's use this lesson as prompt to raise the profile of the other 'C' risk.
Here are some useful places to start:
- IFOA Practical guide to climate change for general insurance practitioners
- PRA Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change
- FCA Climate Change and Green Finance
- Task force on Climate-related Financial Disclosures (TCFD)