Reports: Policy support for climate adaptation investments ‘insufficient’

CISL's findings indicate that in some developing nations

Published today (22 February) by finance industry group ClimateWise and the University of Cambridge Institute for Sustainability Leadership (CISL), the research warns that financial losses from climate-related risks will continue to rise if policymakers do not undertake “significant risk management efforts”.

Under the Intergovernmental Panel on Climate Change’s (IPCC) most extreme global warming projections of a 4C rise by mid-century, average flood-related annual losses to UK mortgages would more than double, the research reveals.

But, according to the first of the reports – entitled ‘physical risk framework: managing the physical risks of climate change’ – property-level adaptation could offset up to 65% of the increase in losses which would be borne by a 4C trajectory.

Realising this level of adaptation, the report claims, would require ambitious action from national governments, local authorities, finance firms and individual investors alike. It notes that global weather-related financial losses exceeded $325bn in 2017, with 70% of losses not covered by any insurance, and that natural-disaster-related economic losses have averaged $180bn each year for the past decade.

To help spur action, the document sets out a practical, step-by-step guide designed to help investors and lenders incorporate natural catastrophe models into their portfolio choices.

Specifically, it advises such companies and individuals to collect detailed, asset-level data around all climate-related hazards and vulnerabilities, before selecting a natural catastrophe model which forecasts the potential losses of a range of warming trajectories. They are then encouraged to adapt their portfolios or decision-making processes in line with the findings.

Such a framework is similar to that offered by the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations, which urge companies to adopt a scenario analysis approach and forecast the impact of a 1.5C, 2C and hotter world on their business. However, after warnings that finance firms were using the TCFD to focus more on transitional risks than physical ones, the CISL framework focuses specifically on physical risks and opportunities.

“The key observation of this report is that we need to focus on both the mitigation of climate change and adaptation to its effects, and that if we do both, we can maintain affordable insurance,” Lloyds Banking Group’s head of underwriting David Rochester said.

“This is an important message and one that Lloyds Banking Group very much supports. This open-source tool will provide investors with the means of accessing the information they need to take action to mitigate climate risks and protect their assets.”

Lloyds Banking Group is one of ClimateWise’s 25 member organisations, which are tasked with helping insurance service providers to adopt a leadership position in the sector’s drive to respond to the risks posed by climate challenges. 

Financing the low-carbon transition

The second of CISL’s new reports, entitled ‘transition risk framework: building capacity to manage the impacts of the low carbon transition on infrastructure investments’, explores how policy changes could affect investors and lenders involved in financing the low-carbon transition.

It offers such firms a three-step process to measure how these moves, compounded by shifts in market preferences, can pose risks to their portfolios and opportunities for their business. The framework is aligned with the TCFD recommendations and encourages investors to define the potential impacts of the low-carbon transition on their portfolios before incorporating these projections into their financial models.

This advice, the report claims, comes at a time when investors will need to funnel $94trn into infrastructure projects by 2040 – with increasing pressure now on to ensure that such projects are low-carbon.

“It is crucial that this infrastructure both supports our transition to a low-carbon future and is financially resilient to the inevitable social, economic and technological impacts this transition will bring,” ClimateWise’s chair Dominic Christian said. “Exposure to infrastructure investments stretches across the financial services sector, yet few asset owners are truly considering transition risk.”

The recommendations come at a time when finance giants are increasingly announcing plans to make their portfolios more sustainable by divesting from coal companies and those linked with deforestation, amid concerns that the next financial crash will be climate related.

Several firms within the sector are also making moves to align their respective portfolios with the aims of the Paris Agreement, after Dutch bank ING announced that it would help the companies it invests in to adopt 2C emissions targets last year. Since then, a coalition of almost 400 investors with $23trn in collective assets pledged to step up its climate action plans in a bid to help the global finance sector meet the aims of the Paris Agreement.

Sarah George

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