Report: Financial Community Sees Climate Risk as Improperly Priced

May 21, 2020 by

Climate risk is widely seen in the financial community as being improperly priced.

A recent survey with an emphasis on the financial sector shows the overwhelming majority of respondents think that climate risk has only been either partially priced or totally omitted from the market’s pricing of products, with the complexity of climate-change forecasting and the lack of reliable climate risk data being cited as among the pricing difficulties.

The survey out this week from the Global Association of Risk Professionals, a group with members in 190 countries, is more extensive than last year’s survey with more than triple the number of companies participating. The GARP survey included 43 banks, 13 asset managers and 15 other firms, including insurers. Interviews for the survey were conducted between December 2019 and February 2020.

The survey shows that in the short term, the biggest concern for most firms is the lack of reliable models for climate risk, followed by regulatory uncertainty.

Other highlights from the survey include:

  • Banks and other financial institutions are intensifying their focus on climate risk management – 90% of firms have board-level governance of climate-related risks and opportunities, up from 81% in 2019, however only 30% feel their firm’s strategies are resilient against climate change beyond 5 years.
  • Most (93%) firms do not have a dedicated team for managing climate risk. This is probably because most firms view climate risk as a transverse risk that cuts across risk types such as credit, market and operational, as opposed to a principal risk, and so are managing climate risk within existing risk teams.
  • Firms recognize there are opportunities arising from climate change and are modifying product lines. Three quarters of firms have already introduced new products or services due to climate change, and a similar proportion (76%) plan to change existing products or services or launch new ones in the future.

COVID & CO²

Government policies during the COVID-19 pandemic have drastically reduced energy demand around the world, with international borders closing and populations confined to their homes.

Daily global CO² emissions fell by 17% by early April compared with the mean 2019 levels, nearly half of that from changes in surface transport, according to a new study out in the journal Nature.

Before the pandemic, emissions of carbon dioxide were rising by about 1% per year over the previous decade, the report shows.

During previous economic crises, the authors of the report note, decreases in emissions from reduced transit and activity were short-lived and followed by a rebound that restored emissions to their original trajectory – except when these crises were driven by energy factors, like the oil crisis of the 1970s and 1980s.

During the 2008-2009 global financial crisis worldwide CO² emissions fell 1.4% in 2009, and that was immediately followed by a growth in emissions of 5.1% in 2010, well above the long-term average.

“Emissions soon returned to their previous path almost as if the crisis had not occurred,” the authors state in the report.

During the current crisis the authors examined 69 countries, 50 US states and 30 Chinese provinces, which represent 85% of the world population and 97% of global CO² emissions.

Europe Summer

Europe faces a sweltering, tinder dry summer, posing troubling times for farmers, utilities and transportation on inland waterways, say scientists at the Copernicus Climate Change Service.

The service this week published a seasonal outlook, with models showing that hotter and drier weather is highly likely to stretch across key agricultural regions in the European Union, potentially compounding drought conditions that have been made worse by climate change.

The outlook was covered by Bloomberg in a detailed article published on Insurance Journal. The model combines data from scientists in the U.K., France, Germany, Italy and the U.S., using measurements from satellites, ships, aircraft and weather stations around the world.

The scientists predict with greater than 50% probability that temperatures across Spain, France and parts of Italy will be well-above average in July, and with more than 40% probability that rainfall across swathes of central Europe, France and Spain will be well-below normal.

Europeans may not be alone in feeling record summer temperatures. The scientists project with more than a 60% probability that large sections of the U.S. East and West coasts will record well-above-average temperatures in July.

Instead of reacting to the data with passive caution, some have moved on the information to try and capitalize on it.

“The increasing volume of satellite data being crunched by Copernicus and other scientists is already feeding into European policy and business,” the Bloomberg article notes. “Heineken NV used Copernicus data to improve beer brewing by lowering the amount of water needed in the process. Broker Marex Spectron Group Ltd. has used the information to forecast coffee, sugar and cocoa yields.”

Climate-Driven Megadrought

A historic megadrought is very likely in progress, with climate change is playing a part in that, according to a new study based on weather observations, 1,200 years of tree-ring data and climate models.

The megadrought represents the second driest 19-year period since 800 CE, exceeded only by a late-1500s megadrought, the study appearing this week in the journal Science

“The megadrought-like trajectory of 2000–2018 soil moisture was driven by natural variability superimposed on drying due to anthropogenic warming,” the study states.

The study covers an area stretching across nine U.S. states from Oregon and Montana down through California and New Mexico, and part of northern Mexico, according to the Columbia University blog State of the Planet. It identified four megadroughts lasting decades: during the late 800s, the mid-1100s, the 1200s, and the late 1500s.

Scientists then compared those megadroughts to soil moisture records from observed weather from 2000 to 2018. “Their conclusion: as measured against the worst 19-year increments within the previous episodes, the current drought is already outdoing the three earliest ones,” the blog states.

Because of global warming, the authors say that average temperatures since 2000 have been pushed 2.2 degrees Fahrenheit above what they would have been otherwise.

“Because hotter air tends to hold more moisture, that moisture is being pulled from the ground. This has intensified drying of soils already starved of precipitation,” the blog states.

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