Out with climate change, in with climate risk

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Courtesy of GLOBE SERIES

The impacts of the negative externalities caused by human actions and inactions towards the environment are often shrouded by the bickering debates of scientists, environmentalists, politicians and other stakeholders regarding the science of climate change.

While the 'controversy' surrounding climate change continues, the realities of climate-related disasters are very true as observed in last year's earthquake and tsunami in Japan. These climate-related issues are not just a science but also a global risk.

Without further investment and attention to 'climate risks,' this may actually cause up to $19 billion USD in GDP losses for some countries by 2030 (Swiss Re 2011). Much focus then needs to be on climate adaptation at both micro- and macroeconomic levels.

The Argument for Climate Risk Management

A climate risk management model shifts the debate around the science of climate change and attempts to quantify the potential likelihood and impact environmental externalities may cause to individuals, businesses, institutions and society in general. A risk management approach would also pave way to encapsulating environmental externalities into existing costing practices.

The 2012 World Economic Forum report on global risks measured various environmental risk impact and likeliness scenarios over the next decade. Rising greenhouse gas emissions and failure of climate change adaptation were surveyed to have the highest risk impact and likelihood risk profile. In its 2011 Global Risk Assessment, climate risk was identified as the most pressing of all global risk (World Economic Forum 2011).

By viewing climate change not as a falsifiable science, but a measurable reality, it is possible to strategically mitigate or transfer these risks through existing risk management frameworks and practices.

Quantifying Risk, Realizing Opportunities

As with the age old adage, with risk comes opportunity. The opportunity that arises from climate risk classification is three pronged.

Firstly, a climate risk approach dispels the perception of uncertainty and complexities associated with the traditional debate on climate change and rather provide a framework for quantifying and relating to the immediacy of this global situation.

Secondly, climate action has always been driven by progressive government public policy. The identification of climate risk would inverse this top down approach and allow a broader audience to relate to the immediate impacts of these risk factors and accelerate their governments to adopt higher public policy standards.

Lastly, quantifying some of these intrinsic climate risks will motivate institutional and private investors to take action and mitigate or transfer these risks in order to maximize their risk-adjusted returns.

Organizations such as the Investor Network on Climate Risk have partnered with global investors to advance investment opportunities and reduce risks posed by sustainability challenges. In the 2012 investors Action Plan on climate change risk, they have called for investors to respond to climate risk by:

  • Researching and pursue low-carbon and sustainable water technology investments and investment strategies with competitive risk-adjusted returns across all asset classes.
  • Take on cost-effective opportunities to increase energy efficient investments;
  • Work with all levels of government to promote a transition to a low carbon economy.

Recognition of climate risk would also enable the existing insurance industry to provide a buffer and a transferal mechanism for individuals, institutions, and businesses to account for the economic costs associated with climate risk.

Swiss Re, a leading global insurance company, for example has proposed public-private partnership models for insuring against such risk factors. However, it also identified that a competitive landscape supported by strong public policy is also instrumental to develop the market for such risk transferal mechanisms.

Perhaps It's time to stop trying to prove or disprove climate change and to start addressing these change factors as physical and quantifiable risks. Then we can get down to the business of pursuing the opportunities and challenges inherent in them.

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