Allianz Risk Barometer 2020 - Climate change / increasing volatility of weather

Four years after the United Nations’ momentous Paris Agreement – the target of which is to keep the increase in global average temperatures to well below 2°C above pre-industrial levels, and to try to limit the rise to 1.5°C – it has become clear that the progress and policies on emission reductions has, so far, been insufficient.

Many industries are facing major transformation risks – and expenses – in order to ensure their future business models are more climate-friendly. Overall, Allianz has estimated that responding to the challenges posed by climate change could cost companies worldwide as much as $2.5trn over the next 10 years [1] with the cost of making the energy sector more “green” the highest. The automotive, chemical and agriculture industries are just a few of the other sectors that will be particularly impacted.

“If these sectors don’t prepare and take action now in a structured way they will face increasing regulatory and governmental pressure which will force them into a belated transition over a very short time period,” says Thomas Liesch, Climate Integration Lead at Allianz. Measures will include carbon pricing, energy and efficiency mandates, mobility regulations and industryspecific taxes, fines and levies. Companies therefore have to address transition risks and start de-carbonizing their business models. The key to resilience is to reduce emissions and adapt to inevitable levels of climate change.

“Transformation comes with investments and costs of course, but these are outweighed by new opportunities,” says Liesch, adding that the costs for companies can be many times lower than the business opportunities offered by new business models, products and sales markets, such as new renewable energy production methods, battery production, rare earth mining, or new technologies, such as hydrogen generation from excess renewable power, for example.

According to Allianz Risk Barometer respondents, the increase of physical losses from climate change is the exposure businesses fear most (49% of responses), followed by the operational impact and then the consequences of potential changes in their market and regulatory environments.

“Economically, the physical risks and costs of a +3°C or +4°C world are many times higher than doing nothing,” says Liesch. “A significant increase in heatwaves and droughts, loss of the Amazon rainforest, desertification of the Mediterranean region, thawing of the permafrost, a rise in extreme weather events and sea- levels and a reduction in the value of exposed property, abandonment of low-lying coastal areas and increased adaption (e.g. building barriers and drainage solutions) and maintenance costs are just some of the many consequences that would lie ahead,” Liesch notes, citing the findings of The Heat Is On – Insurability and Resilience In A Changing Climate report by the CRO Forum, a group of professional risk managers from the insurance industry, of which Allianz is a member.

Global warming fuels extreme calamities worldwide and threatens business. Rising seas, drier droughts, fiercer storms and massive flooding pose physical threats to firms because they imperil factories and other assets, as well as transport and energy links that tie the entire supply chain together.

“Climate change is often presented as an issue for tomorrow with global warming paths calculated for the end of the century. But this perspective is swiftly changing,” says Amer Ahmed, CEO of Allianz SE Reinsurance. “A focus in public discourse on a ‘climate crisis’ or ‘climate emergency’ is emphasizing the toll our society is already paying today.”

Allianz Re provides an annual award to researchers into climate change, as well as solutions to mitigate the effects. “As risk-carriers, insurers have skin in the game,” says Ahmed. “And the climate crisis is already impacting our business.” For example, 2017 was a year of particularly significant catastrophes. Houston experienced its third “500-year flood” in less than four decades, while California suffered five of its 20 most destructive wildfires ever.

There are a growing number of other perils associated with climate change that need to be addressed in both developed jurisdictions and emerging markets in addition to companies facing the prospect of larger losses from more severe weather events. “Companies are realizing that they may face consumer criticism, reputational damage and increasing regulatory and legal action if they don’t adequately address climate change in their business strategy, operations and product offerings,” says Chris Bonnet, Head of ESG Business Services at AGCS.

It is estimated that around 1,500 new laws are being introduced around the world every year in response to climate change, although different jurisdictions are taking different approaches. Europe is focused on the financial sector – for example, in the UK, it was recently announced that lenders and insurers will be tested against three different scenarios that stretch out decades under what the Bank of England claims will be the “world’s stiffest climate stress tests”. In Australia, there has been a lot of work to integrate climate risk into prudential regulations. Japan has recognized that the integrated nature of its financial system and heavy industry calls for a joined-up approach – 194 companies have adopted the recommendations of the Task Force On Climate-Related Financial Disclosures. Singapore is also regarded as one of the leaders when it comes to climate change disclosure.

It is not just governments and regulators who are putting pressure on companies about how they are responding to climate change, however. Climate-linked activism against corporates is a developing trend – particularly in Europe – and boards are increasingly being challenged by investors and other stakeholders. For example, activist hedge fund TCI recently outlined plans to punish directors of companies that fail to disclose their carbon dioxide emissions and also called on asset owners to fire fund managers that do not insist on climate transparency [3].

“Many stakeholders have an interest in corporates’ response to climate risk, and any reputational damage from failure to take action will influence stakeholder choices,” says Karsten Berlage, Regional Head, Americas, at AGCS’ Alternative Risk Transfer unit. “Capital investors may choose against a firm deemed not to be environmentally-friendly, while ratings agencies and the media will be looking closely at what companies are doing to avoid climate  disasters.”

There is little doubt that a failure to disclose climate change risk will drive more litigation in future years. Climate change cases have already been brought in around 30 countries around the world to date with three-quarters of those cases filed in the US. In the US, there are an increasing number of cases alleging that companies have failed to adjust business practices in line with changing climate conditions. Many lawsuits are currently targeting the so-called “carbon majors” – active fossil fuel producers. However, this will likely expand to other carbon-heavy industries, such as agri-business, manufacturing and transport.