Climate change ‘will damage profits of the financial sector’
Financial Times, 2 May 2005 – Financial institutions are laying themselves open to risks to their profitability by failing to budget for the effects of climate change, according to a merchant bank that specialises in climate change risks.
Louis Perroy, an actuary at Climate Change Capital, said: “Most financial institutions think of climate change in terms of corporate social responsibility, but really they should be thinking of themselves.”
Climate change is caused by increased levels of carbon dioxide in the atmosphere as a result of fossil fuel use. In a report to be presented to the Institute of Actuaries next month, Mr Perroy quotes Munich Re, which says: “Climate change will significantly increase the frequency and severity of heatwaves, droughts, bush fires, tropical cyclones, tornadoes, hailstorms, floods and storm surges in many parts of the world.”
This could have knock-on effects such as heatwaves, lower crop yields, increased levels of subsidence and increase in certain diseases. Insurers and reinsurers are already feeling the effects of climate change on their bottom line as claims from extreme weather events have increased.
Munich Re says that before 1987, there was only one event causing an aggregate insured loss of more than Dollars 1bn. Since then, there have been 46. Storm and flood losses in the UK between 1998 and 2003 were Pounds 6.2bn, double the amount in the previous five years.
“All financial projections of liabilities and assets over a time horizon of more than 25 years or more should consider the potential impacts of climate change,” said Mr Perroy.
Assets of institutional investors are likely to suffer because of an increase in climate change related regulation such as this year’s emission trading scheme and the Kyoto Protocol, as well as the macroeconomic disruption climate change will cause.
But the problem is not taken seriously because “climatic models are too imprecise in terms of the timing or location of impacts,” said Mr Perroy.
Financial institutions should be putting pressure on companies with high carbon dioxide emissions to emit less, lobbying for stricter legislation, investing in companies committed to cutting emissions and in those that will generate tradable carbon credits.
Copyright 2005 The Financial Times Limited
Financial Times (London, England)
Author Mike Scott
Publication Date 02.05.2005