Companies urged to realise true cost of extreme weather
Public and private sector organisations are being advised to report their maximum probable annual losses caused by extreme weather, compared with their current assets and operations.
The recommendations come from the latest Royal Society report – Resilience to extreme weather – which encourages all capital owners to realise the value of adapting to extreme events.
The Society suggests that firms use the ‘triple stress test’ to report the following:
– One in 100 (1%) risk per year: a stress test for the current solvency of a company, evaluating its maximum probable annual losses for extreme weather events which occur once every 100 years, or have a 10% chance of occurring decennially
– One in 20 (5%) risk per year: a stress test for the annual earnings of a company
– Annual Average Loss (AAL): a standardised metric for a company’s exposure to extreme weather events
Member of the working group for the report Rowan Douglas said: “If two otherwise identical international companies have different resilience to extreme weather risks that would impact their potential solvency or profit.
“For example one has unprotected factories located in high-risk floodplains, then one should have a proportionately lower share price or valuation to reflect this higher financial risk. However, this rarely happens.
“As the frequency and severity of extreme events is increasing, there is increasing exposure of assets to risk. This brings an ever larger disconnect between material risk and asset valuation.
“Unless financial reforms are made to correct this, we will condemn ourselves to building vulnerable cities in the coming decades at the cost of millions of lost lives and livelihoods and billions of lost dollars, often across regions and communities that can least afford these catastrophic setbacks.”
An example of a company evaluating and reporting risk is Asda which, in June, released the Climate Adaptation Framework study, developed with PwC, which mapped out the risks posed by climate change across its entire trading operations and looked at potential obstacles that lie ahead.
As part of that Framework, Asda identified the stores that were most ‘at risk’ from flooding and is looking further into individual situations as well as liaising with the Environment Agency to conduct full flood-risk impacts for all stores and distribution centres.
The Royal Society report also calls for Governments to reform global financial regulation to make sure extreme weather risk, which is not always factored into investors’ valuations or assessed by creditors, is given a due consideration. Those who implement policies should take practical measures to protect people and their assets from extreme weather.
The Society recommends that Governments develop and resource resilience strategies and act together at international level, sharing expertise, coordinating policy and pooling resources to build resilience and deal with risks.
Finally, research should be carried out to improve the understanding of extreme weather risks and model future climate change impacts to provide relevant information for decision-makers, especially at regional and local levels.
Friends of the Earth climate campaigner Guy Shrubsole described the report as a ‘timely wake-up call’ for politicians to ‘get serious’ about protecting the country from climate change.
He said: “The Chancellor must use next week’s Autumn Statement to invest seriously in flood defence schemes to protect hundreds of thousands of UK households and businesses increasingly at risk from extreme weather.
“George Osborne must also do far more to tackle climate change in the first place – ending tax breaks for dirty gas and oil and investing in a massive energy efficiency programme instead would be a good first step.”
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