Managing climate risk

Underlying the growing pressures for boards to be climate-competent is the question: how resilient is the organisation to the impacts of climate change?

Globally, organisations and boards are grappling with answering the question of how climate change will affect them.

The question is being raised with greater frequency and urgency due to pressure from investors, regulators, customers, supply-chain partners and competitors.

While climate change is on boards’ agendas, there are many challenges to understanding the risks, business and financial impacts. Many organisations are simply reverting to addressing the risk in a business-as-usual way, ie by managing property and business interruption assets and losses by way of traditional insurance.

The New Zealand Government’s strategy on climate change and resilience is promoted by the Ministry for the Environment. They have made plenty of material available to highlight, and assist in understand, the issues and the likely impact on our personal and business lives. From a financial perspective, the focus is on long-term stability.

The Task Force on Climate-Related Financial Disclosures is another excellent source of material on managing climate change.

Climate risk profile

In the Regional Risks for Doing Business 2019 report (published by the World Economic Forum), countries were classified in terms of exposure to environmental, societal, geo-political, economic and technological risks. Unsurprisingly, New Zealand’s top five risks are:

1. natural catastrophes
2. cyberattacks
3. failure of critical infrastructure
4. failure of urban planning
5. extreme weather events.

Through the sequence of earthquakes and major storm and flooding events in New Zealand over the past decade, there was a heavy reliance on insurance to assist in the recovery from these natural catastrophic events. Environmental risks feature twice in the top five risks to which entities are exposed. This signals the urgency surroundingenvironmental risks to government, business and New Zealanders in general. The causes and impacts of climate change need to be tackled. 

While natural catastrophe insurance is still available, insurers globally are monitoring events very closely. It is easy to conclude that as natural catastrophe events continue to become more relevant in terms of frequency severity, insurers will, at some point, restrict or remove cover, for what they are starting to view as high frequency and severity inevitable events.

During 2017 and 2018, there were more than 17 major events here in New Zealand alone, with the total insurances costs running as high as NZ$500m. This amount does not include uninsured losses or costs borne by local and central government.

This trend is causing businesses and home owners to reflect on their insurability. There are some key issues that need to be considered:

• Will insurers continue of offer cover for loss/damage caused by (the more predictable) effects of climate change?
• If so, will the cover be affordable?
• What about the financial impact of business interruption?
• Will directors and officers become more exposed, if their companies fail or elect not to secure full insurance coverage?
• What is the role of local and central government, from a loss mitigation and post loss recovery perspective?
• Will there be any central funding (e.g. similar to that available from EQC)?
• What role of banks and financial institutions play?

This article is featured in Boardroon issue December January 2020 

For more information, contact Steve Walsh, chief client officer at Marsh New Zealand.