A 1-Hour Climate Risk Webinar

This Climate Site, extracted from the Climate Web, displays materials recently used by the Climatographers to deliver a 1-hour webinar focused on climate risk to an insurance- and business-risk audience. It does not include the narration of the webinar, so it may not be intuitively obvious exactly what points are being made, but we hope that it’s useful. The Climate Web makes it possible to easily modify the webinar for other audiences and purposes. Contact the Climatographers to discuss!

A key point of the webinar is that while societal climate risk and business climate risk are related, they are by no means the same thing.

Topics Covered:

A VERY Short Business Climate Risk History

Physical Climate Risk

Regulatory/Policy/Transitional Climate Risks

Systemic Climate Risk

The Problem of Under-Estimated Climate Risk

Managing Business Climate Risk

Part 1 - Intro

A VERY Short History of the Conversation

While one can think of the “business and climate change” conversation as going back several decades, it’s probably more appropriate to think of it seriously taking off in just a decade ago after the release of key reports by Mercer Consulting. Some topics, like potential business liability for climate change, have been underway for decades, but until recently haven’t really broken out of the background noise.

1978 Exxon memo warns that humanity only has 5-10 years before "hard decisions regarding changes in energy strategies might become critical."

1988 BP's President warns that climate change might require a "dramatic reduction in our dependence on fossil fuels."

2008/2 Alaskan village of Kivalina files lawsuit against ExxonMobil asking for monetary damages

2011 Mercer Consulting declares expected climate policies a potentially material business risk, the same report advises companies that material physical climate risks are still decades away

2015 Mercer Consulting issues a new report warning that climate change has arrived (early), and that physical climate risks are now potentially material

2017/9 San Francisco and Oakland file climate liability lawsuits against oil produceers to cover costs of sea level rise

2018/8 Church Investors Group representing 20 billion Pounds in assests, engaging with company boards to encourage disclosure

2018/10 New York sues ExxonMobil for falsely claiming use of an internal price on carbon, which was portrayed as managing future regulatory risk, when it really wasn’t

2019/9 Redburn concludes that the exposure of the Majors to "transition risk" is rising, double-bumping ExxonMobil directly from Buy to Sell, in addition to downgrading other Majors

2019/9 Shell lists divestment campaigns as a material risk in its annual report

2021/7 Dutch Court orders Shell to reduce its emissions

Part 2 - Short History of Business Risk

Physical Climate Risk

There is a huge focus today on the business risks posed by the physical impacts of climate change. That said, much more risk is likely to be associated with the 2nd and 3rd order impacts of climate change on business operations, infrastructure, supply-chains, and markets.

Part 3 Title

2017 Clapp_Shades of Climate Risk Categorizing Climate Risk for Investors

Physical Risk

2017 Clapp_Shades of Climate Risk Categorizing Climate Risk for Investors

2010 NRC_Climate Stabilization Targets

2010 Area burned in Western U.S. with a 1oC change in global temperature

2010 NRC Climate Stabilization Targets

There are a number of questions to consider in the context of physical risks:

How Sensitive Are You to Physical Risk-Related Impacts and Disruptions

Have You Considered 2nd and 3rd Order Impacts?

How Much Climate Change Are You Thinking About? The global targets of 1.5 or 2.0 degrees, or the more likely 3.5 degrees C?

How Are You Thinking About Highly Uncertain Risk Variables, e.g. Seal Level Rise with Forecasts Ranging from 1.5 Feet to 10 Feet or More?

Have you Considered the Potential Near-Term Impacts of Climate Change Tipping Points?

Physical Risk Questions

Policy/Regulatory/Transition Risk

Inevitable Policy Response?

Level of Carbon Pricing?

Consumer Response/Social License to Operate?

Liability Risk?

Part 4 Title

2017 IAM generated carbon pricing to achieve the 2oC target

2017 CPLC_Report of the High-Level Commission on Carbon Prices

2017 Necessary carbon prices also depend on the presence of other policies

2017 CPLC_Report of the High-Level Commission on Carbon Prices

2017 TCFD_Technical Supplement The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities

2016 Interplay between transition and physical risks

2016 TCFD_Technical Supplement The Use of Scenario Analysis in Disclosure of Climate Related Risks and Opportunities

2017 TCFD_Technical Supplement The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities

2017 The trade-off between physical and transition risk

2017 TCFD_Technical Supplement The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities

2016 Schoenmaker_Financial Risks and Opportunities in the Time of Climate Change

2016 Alternative pathways of physical vs. transitions risks

2016 Schoenmaker_Financial Risks and Opportunities in the Time of Climate Change

2017 Clapp_Shades of Climate Risk Categorizing Climate Risk for Investors

Transition Risk

2017 Clapp_Shades of Climate Risk Categorizing Climate Risk for Investors

Systemic Risk

Part 5 Title

2015 Lloyds_Food System Shock

2012 The global food trade

2012 Lee_Resources Futures

2016 Aglietta_Climate and Finance System Risks More than an Analogy

Climate change has all the characteristics of financial systemic risk

2016 Aglietta_Climate and Finance System Risks More than an Analogy

2016 Aglietta_Climate and Finance System Risks More than an Analogy

Systemic shocks are by definition non-insurable and non-diversifiable

2016 Aglietta_Climate and Finance System Risks More than an Analogy

Under-Estimated Climate Risk

https://underestimatedriskroadmap.climatesites.net

Part 6 Title

We are over-confident in predicting the future

Risk = Consequence x Probability

2020 Risk probability vs. magnitude

Long Tail of the Risk Distribution

A risk assessment is conservative when it maximizes internalization of uncertainty

The IPCC implicitly downplays the potentially devastating, non-linear outcomes

2018 Spratt_What Lies Beneath - the Understatement of Existential Climate Risk

2011 Probability distributions of climate sensitivity

2011 Degrees of Risk_Defining a Risk Management Framework for Climate Security_Full Report

2020 Cascading potential climate tipping points

2020 Bolton_The Green Swan Central banking and financial stability in the age of climate change

Climate change assessments should focus more on key uncertainties

2017 Dunlop_Disaster Alley Climate Change Conflict and Risk

Managing Business Risk

Direct Relationship Physical and Systemic Risk

Inverse Relationship Between Policy Risk and Systemic Risk

Inverse Relationship Between Policy Risk and Physical Risk

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Part 7 - Title

2013 Dow_Limits to adaptation to climate change: a risk approach

Acceptable, tolerable, and intolerable risk

2013 Dow_Limits to adaptation to climate change: a risk approach

4oC may be “beyond adaptation”, and even 3oC could be regionally catastrophic.

2019 Spratt_Existential climate-related security risk A scenario approach

2021 Not all business responses are created equal

Assumptions Audit

Management gurus have long advised business leaders to frequently reevaluate their core business assumptions, and business books are full of case studies of the bad things that happen when companies fail to heed that advice. As noted by scenario planning expert van der Heijden, for example:

“ . . . in times of rapid change the large well-run companies are in particular danger of suffering from strategic failure, caused by a crisis of perception….[because of] the inability to see an emergent reality by being locked inside obsolete assumptions.”

A Few Key Climate Risk Assumptions

Does Reducing Your Footprint Reduce Risk? Which One?

Do Net Zero Commitments Reduce Business Risk?

Does Risk Disclosure Reduce Business Risk?

Will Natural Climate Solutions Survive Climate Change?

What Carbon Price Would be Associated with a 2oC Target?

Assumption Audit

Scenario Planning

Scenario Planning

2018 CICERO_Climate scenarios demystified: A climate scenario guide for investors

2018 The most common scenarios

2018 Berg_Climate scenarios demystified A climate scenario guide for investors

2020 NGFS_Guide to Climate Scenario Analysis for Central Banks and supervisors

2020 Carbon price evolution across the 3 scenarios

2018 CICERO_Climate scenarios demystified: A climate scenario guide for investors

2018 WEO vs. IPCC scenarios - several variables

2018 Berg_Climate scenarios demystified A climate scenario guide for investors

2011 Mabey_Degrees of Risk PPT

2011 Plan for “Perfect Storm” and Policy Failure Scenarios

2011 Mabey Degrees of Risk PPT