Opinion

Felix Salmon

Still looking for a climate-change strategy

By Felix Salmon
March 11, 2010

Initial reaction to my Climate Desk bleg has been pretty interesting. I’m looking for companies which are taking a serious strategic look at managing the risks of climate change, and so far I haven’t really found any. The on-topic responses I have received have generally fallen into two categories: “look at the reinsurers”, and “look at us, we’re doing a great job reducing our carbon emissions”.

The carbon-emissions story is basically about positioning a company for present and future emissions regulation, as well as doing one’s part to try to prevent the worst excesses of climate change itself. But it doesn’t really help in terms of positioning a company for whatever effects of climate change do come.

As for the reinsurers, they are certainly looking a lot at climate change, especially insofar as they’re involved in catastrophe reinsurance: hurricanes, in particular, are associated with a rise in sea-surface temperatures. So as the global climate gets warmer, it makes sense for hurricane reinsurance premia to rise. I haven’t yet talked to any reinsurers directly, or even read their reports — if anybody has some useful links for me, I’d be eternally grateful. But outside of hurricanes, it seems that the effects of climate change on reinsurance rates are pretty small in areas like crop or life reinsurance.

More generally, pricing tail risks is what reinsurers do — it’s pretty much the core part of their job. When they look at the possible effects of climate change, they’re not making a strategic decision about the long-term future and structure of their business: they’re just pricing pretty short-term insurance contracts, like they’ve always done, using as much information as they have to guide them.

It’s important to remember, here, that reinsurance contracts are generally only a year or two in length — in that respect, reinsurers don’t really care all that much, when they’re pricing policies today, about what the global climate is going to look like in 30 years’ time. As and when climate change happens, reinsurers can react to it: if there are areas of the UK with lots of flood-insurance policies and sea levels start rising, for instance, there will be more than enough time for reinsurers to react by jacking up flood reinsurance rates or simply refusing to offer that product at all.

One other group of people has a long-term time horizon and is very alert to tail risks, and that’s institutional investors. To that end, a large group of buy-side firms, along with Mercer and the World Bank, has launched a climate change strategic asset allocation study designed “to identify potential new investment opportunities and possible future risks related to climate change”.

That’s a very good and worthy idea. But it does seem to me that risk management, when it comes to climate change, is best done at the corporate level, rather than at the shareholder level. If a big agricultural company risks running out of water, for instance, then it might make sense to be wary of its stock, or to worry about tail risks there. But it would make much more sense for the company itself to put in place a strategy for making sure that it will continue to be able to produce large amounts of food, even in the event that the environment in general, and local water access in particular, starts to deteriorate. That’s the kind of thing I’m really looking for, and that’s the kind of thing that so far I haven’t really found.

Comments
7 comments so far | RSS Comments RSS

If you never find what you’re looking for on this subject, what do you think that signals?

Posted by glenngulia | Report as abusive
 

signals that financial planning has a 5-7 year timeframe, that’s what it signals.

seriously today when getting into a passing argument about “real wealth” with a guy who wanted the gold standard it occurred to me that the real wealth is nature. How much would gold help in the dystopia of that recent movie made from McCormick’s novel The Road? We need to move to some mechanism of wealth whereby the health of the natural world backs our currency.

Posted by Eastvillagechic | Report as abusive
 

If companies are really making long-term moves in anticipation of climate change, do you think it will be very obvious to us? Like if an agriculture company really thinks we will run out of water, maybe it’s already getting out and selling farmland to property developers. The developers will then sell to schmucks who have no idea of the impending water shortage.

Posted by rogueecon | Report as abusive
 

Felix–You say ‘when climate change happens’; of course you know it already is. Climate change kills at least 150,000 people annually, according to the World Health Organization: http://www.who.int/heli/risks/climate/cl imatechange/en/
Look for me on HuffPo as I document how our changing climate can be devastating to human health.

Posted by SarahLovingerMD | Report as abusive
 

“If a big agricultural company risks running out of water, for instance, then it might make sense to be wary of its stock, or to worry about tail risks there.”

Felix,

That’s an interesting example. Do you know of a single agricultural company in North America who’s experienced noticeable problems of this kind outside of the drought and flood cycles observed ever since mankind began experiencing with agriculture?

Posted by yr2009 | Report as abusive
 

There are some good examples displayed through the Carbon Disclosure Project website: https://www.cdproject.net/en-US/Results/ Pages/overview.aspx under the general and physical risk sections.

Posted by analystMD | Report as abusive
 

“signals that financial planning has a 5-7 year timeframe, that’s what it signals.”

Why does anybody bother to drill for oil then? I think you are avoiding the obvious conclusion.

Posted by Mr.Do | Report as abusive
 

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