How businesses can build resilience to climate change

How businesses can build resilience to climate change | Corporate Risk & Insurance

How businesses can build resilience to climate change

by Nick Howard (pictured above), principle consultant, and Bram Miller (pictured below), technical director, at engineering and environmental consultancy Ramboll 

A recent report by the Intergovernmental Panel on Climate Change (IPCC) warns of the imminent risk of increases in drought, floods and extreme heat with global temperatures rising by 1.5°C.

In fact, climate change has been cited as ‘the biggest global health threat in the 21st century,’ and these threats, from both current extreme weather events and the increased frequency and intensity of these in the future, present direct and indirect impacts that need to be understood by all businesses – including insurance providers and property investors.

Regulators and other stakeholders are increasingly demanding that businesses understand climate change risks. The Prudential Regulation Authority recently published a consultation paper on a draft supervisory statement that sets out expectations on UK insurers (as well as banks and other similar companies) regarding firms’ approaches to managing the financial risks from climate change.

Climate resilience is the ability of a system to anticipate, accommodate and recover from the effects of a hazardous climatic event, while preserving basic structures and functions. It combines the mitigation of, and adaptation to, climate change to prepare for a successful and sustainable future. Climate risks are typically considered over a long timescale, meaning that potential impacts could be a real risk to property investors and insurers during the property ownership lifecycle.

The property sector, and by association insurers, are often directly impacted by climate events due to the physical impacts on their assets. Obvious impacts include flooding (rising river levels and overland rainwater flow due to insufficient drainage capacity or impacts on wastewater conveyancing and disposal systems), storms (physical property damage and impacts on critical infrastructure including power supply and communications networks) and extreme temperatures, as experienced during the UK summer of 2018, potentially increasing long-term requirements for improved cooling and ventilation.

Continually improving climate modelling and forecasting allows insurers to assess these climatic risks more accurately at a much more local scale, and the expectation is that such risks will be increasingly considered by insurers when setting policy premiums and excesses.

To reduce the direct (e.g. physical damage) and indirect (e.g. increased policy premiums, lower long-term property values and reduced ability to attract investment) impacts of climate change, proactive property investors should methodically assess the potential risks and impacts when undertaking pre-acquisition due diligence, refinancing, or during routine portfolio performance reviews. Where significant risks are identified, appropriate resilience and mitigation options should be considered, taking in to account the likelihood of occurrence and impact, and the cost benefit of implementing climate resilience measures, e.g. flood defenses, re-siting of critical infrastructure or building content, early warning systems, back-up power supplies, occupant evacuation plans, etc., or the screening and carve out of higher risk properties in the portfolio.

For investors at the development stage, appropriate consideration of climate change impacts over a 30+ year timescale, and the inclusion of resilience measures in the design process (e.g. sufficiently sized drains and protected critical infrastructure), is essential to ensure resilience, with the likely indirect benefits of potentially lower insurance premiums, higher property values versus those properties without in-built resilience, and a lower chance of physical impact and property damage. Should the government move to introduce regulations for properties to meet climate resilience standards, the risk assessment process will become increasingly important to determine exactly which properties must comply, ensuring that additional costs (but ultimately additional returns) of installing resilience measures are appropriately targeted.

The insurance industry is alive to climate change and often leads the way in its understanding of climate and weather-related risks. With continuing improvement in the quality and availability of climate data at the macro and micro-scale, insurers will increasingly look to consider climate risk and the degree of climate resilience of an individual property or portfolio when preparing policies and premiums.

Property investors can increase their resilience to climate change through improving their ability to anticipate, mitigate and recover from the effects of a hazardous climatic event while preserving basic structures and functions. This most importantly requires proactive planning and forward thinking: it isn’t possible to manage and make financial provision for risks that are not understood.