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CLIMATE CHANGE Rising temperature From agricultural production to changes in the weather, most businesses will be exposed to climate change. But with its risks clouded by uncertainty, how do they reduce that exposure? C Key points 01: The threat of climate change is huge, but establishing the risk is difficult 02: Changes in weather can have disproportionate effects in other areas 03: The total value of assets exposed in 2005 was estimated to be $3 trillion 04: Businesses should be reducing water useage to help reduce their exposure LIMATE CHANGE IS ONE OF THE GREATEST THREATS facing humankind. But it also represents one of the most uncertain, unpredictable risks, and while there is a broad consensus that we face enormous challenges, quite what those will be remains a matter of debate. “It’s very hard to establish the risk,” says environmental NGO Earthwatch head of climate research Dr Daniel Bebber, who works with HSBC on climate issues. “The central issue is uncertainty.” But the limits of scientific knowledge are only the beginning of the problem, and our understanding of the risk is further complicated by the difficulties in mapping human response to change. “Even a tiny fluctuation in the climate can have an effect on agricultural production, but this can be magnified out of all proportion by public panic, market speculation and government response,” says Dr Bebber. “In 2008 a drought in Australia caused a collapse in their rice harvest. They are not a big producer, but the government panicked, worrying that there would be a shortage, which prompted larger producers to react with their own embargoes; then speculators got involved and the price went through the roof. By the end of the year, there were food riots in many countries.” Small changes in the weather can have disproportionately devastating affects in other areas. For example, coastal cities are exposed to a far greater risk from increased storms, surges and sea level rises than inland, yet these areas are where the world’s businesses and populations tend to cluster – and where our financial powerhouses tend to sit. » Making changes to the insurance game plan IN A WORLD OF INCREASED climatic volatility, one industry that is already trying to adapt is insurance. With an increasing number of extreme weather events widely predicted by scientists, it follows that there will be more and more weather-related claims made to the companies that insure everyone from farmers to homeowners. “Munich Re has already assembled an extremely impressive and probably unique database of claims,” says Dr Bebber. “It has separated them into those that are climate-related, such as floods, and those relating to ‘natural’ disasters, such as earthquakes.” In 2010 there were 950 natural catastrophes, according to Munich Re, 90% of which were weatherrelated, giving last year the second highest number since 1980. Overall losses were estimated at around $130bn (€95bn), of which $37bn was insured. That puts 2010 among the six most loss-intensive years for the insurance industry since 1980. [ OCTOBER 2011 ] StrategicRISK 17

October issue of StrategicRISK

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