UK companies are expected to report on climate change risks to their business from 2022; and that may become mandatory. So says the UK government’s Green Finance Strategy, published this week. Banks, building societies, and insurers are expected to be getting on with it already according to their Regulator’s policy statement published in April.
This moves climate change from being a corporate and social responsibility issue for companies, to a financial and strategic imperative.
There are two main types of climate change risk: physical risks such as more violent storms and flooding, and transition risks around the change to a net zero carbon emission economy (change always brings risk, and massive change brings multiple, varied and intertwined risks). And it is expected that they will do this within their current risk frameworks.
But climate change risks should be considered out to a further time horizon than is done in regular risk management. And whilst interdependencies between risks are not often discussed, climate change risks will be correlated, will feature tipping points, will have some fairly certain impacts, and these may well be irreversible.
So, for example, climate change may reduce precipitation and increase temperatures; both of which influence water availability and quality. Water availability for cooling may impact the ability of inland power stations to generate electricity; and depending where we are in transition (e.g. to renewable power sources and to all new vehicles being electric), this may affect transportation. General reduction in rainfall may affect building subsidence and also the transport infrastructure. Deterioration in water quality may adversely affect people’s health and put a strain on health services. Increased temperatures can also lead to higher workplace absenteeism – one study has shown that it rises by a factor of five when temperatures rise from 26C to 28C.. and so it goes.
Data sources: UK Government Green Finance Strategy; climate papers from LSE and Newcastle University