by the UNEP Finance Initiative*
Banks, investors and insurers are looking for more climate information and services to manage increasing risks from heatwaves, floods, landslides, drought, rising seas and other extreme events related to a changing climate.
Climate expertise will be a competitiveness factor in the years ahead, and the financial sector needs better climate information, noted a study by the United Nations Environmental Programme (UNEP) Finance Initiative and the Sustainable Business Institute, a German research centre. Financial service providers are increasingly affected by extreme weather events, and expect these kinds of risks to increase in future.
The study was based on a survey of 60 major firms in the financial sector such as Banco Santander, Munich Reinsurance, Deutsche Bank, Citigroup and Mitsubishi UFJ. The survey covered climate information needs for lenders, asset managers and insurers, in all world regions, including developing and developed countries. As some institutions with multiple business lines completed more than one of the three sections of the survey, there were 65 responses from insurers and reinsurers (11), lenders (35) and asset managers (19).
The survey was launched as a contribution to the Global Framework for Climate Services, following the World Climate Conference-3.
Preparing economies for climate challenges
When asked about how to adapt to a changing climate, many people think of large-scale infrastructure projects such as dams and water systems. Equally important are the millions of dispersed business decisions taken every day that should start to take into account climate change factors and impacts.
Banks, investors and insurers stand out in the commercial landscape for their ability to influence business decisions and economic trends. The financial sector engages daily with clients and investors of all types, sizes and sectors, shaping current and future production processes and services. Given this influential role, the financial services sector is a powerful conduit towards economic systems that are better prepared for climate change challenges.
To manage climatic risks affecting their business portfolios, financial institutions need predictions, analyses and interpretation. Climate information needs to be appropriate to the duration of contracts, the regions where customers hold assets or undertake operations, and the hazards that are likely to affect the operations of borrowers, investors and the insured.
The key challenge for insurers and reinsurers lies in identifying, quantifying and pricing such risks in a dynamic environment. Changing patterns of weather hazards also create new demands for risk transfer and can become a business opportunity for new insurance markets and products.
A different situation holds for lenders and asset managers. They are less familiar with climate change, because the effects have not yet systematically turned into financially relevant consequences. Only just over one quarter of lenders surveyed claim to “systematically always” integrate direct effects of climate change in their operations now. Yet 80% of respondents expect that direct risks – accumulation of risks, changing risk patterns, and increasing credit losses caused by physical impacts – will gain importance in the future.
Insurers: new products, new markets
Insurers are recording variations that are quite different from historical experience and expect these changes will increase in future. They especially see challenges due to shifting climate patterns that give rise to extreme weather events that vary in frequency, intensity, and regional occurrence. The changes are already leading to shifts in insurance products and markets.
Weather-related losses for natural disasters, 1950–2009. Insurers are recording steadily rising losses due to weather-related extreme events. They expect these losses to continue to rise.
The survey shows that 11 insurers from eight countries and three continents recorded an increase in weather-related damages (10), and expect these to increase (11); reported an accumulation of such risks (8), and expect accumulation risks to increase (9); expect risks to change (8), and anticipate these changes will accelerate in future (9).
Already, insurers have recorded a demand for additional risk absorption capacity and expect that this demand will continue. A majority is amending existing insurance products and all expect to do so in future. Most are also developing new insurance products, and all plan to do so in future.
Lenders and asset managers: Growing awareness
Lenders and asset managers are starting to see the impact of climate change risks in their operations. Climate risk assessment, often complex and uncertain, is not their traditional area of competence. Lenders often rely upon insurers to accept these risks on their behalf.
A minority of the 35 lenders surveyed feel that “already today” their credit transactions are affected by an accumulation of risks; changing risk patterns; and increased credit losses due to direct, physical effects of climate change. Only 25% of lenders surveyed systematically integrate climate change into due diligence and risk management procedures.
Yet 80% feel that credit transactions will be affected by these risks in the future, and more than two-thirds agree that risk assessment practices should change now.
Do lenders currently treat climate change as a risk factor? Lenders are shifting their practices to include climate change as a risk factor.
Asset managers rely on aggregated information or self-reporting by companies. Most asset managers surveyed have integrated climate change effects in portfolio management, and seven of 19 are doing this systematically. However, climate change aspects are usually just a small element within the universe of corporate sustainability performance indicators.
A need for past and future climate information
More historical weather data and climate change predictions are needed, survey participants noted. In Africa, 89% of financial groups felt inadequately informed about regional climate risks. Yet even in Europe, 56% said that they needed more information.
The report notes that these results match a 2010 study, How well prepared is the UK for Climate change? Conducted by the UK Government’s Committee on Climate Change. It notes that “many businesses do not think they have access to adequate weather data and climate projections, preventing them from assessing risks from current and future climate.”
Climate information needs by sector. Respondents ranked sectoral information needs and gaps very differently.
Which sectors need climate information most?
Agriculture and the energy sector (reflected in several categories in this survey) stand out as the sectors that need information the most. They ranked sectors in the following order of importance.
- Oil and gas
Where are the biggest sectoral information gaps?
Here, the views of financial institutions on the biggest information gaps show quite a different ranking.
- Oil and gas
Cooperation to improve climate information services
There is an overwhelming interest to collaborate with weather and climate data and information providers, research institutes and other partners to develop information services and formats. The survey showed the following preferences for information, in descending order:
- Sectoral analyses
- Regional scenarios
- Project databases (such as renewable energy projects)
- Databases on weather/extreme events
- Loss and catastrophe models
- Loss databases
- Survey participants also expressed preferences about the format for improved climate information. In descending order, their preferences are:
- Periodic reports for certain sectors and companies;
- Best practice cases that tackle risks and opportunities for financial services;
- Periodic reports by region;
- Training (seminars and conferences);
- Online services (such as Frequently Asked Questions);
- Ad hoc statements and expert opinions;
- Periodic reports on the state of the art in climate science.
Climate research recommendations
Interviews were conducted with German survey participants to determine their priorities for applied climate research. They recommended:
Analyze dynamics of convective extreme weather events (such as hail and heavy rainfall) and their impact on loss potential;
Investigate the climate impact in agriculture and forestry (multi-peril insurance), the water sector, land use planning and the built environment;
Assess extreme events with a “return period” greater than 1 000 years;
Conduct research on loss prevention and adaptation (such as land use planning for the built environment, or adaptation needs of drainage systems).
Towards a global architecture for climate information and services
The study shows the need for more precise knowledge of climate change impacts, especially regionally, for a 10-30 year time frame. It shows the need to provide public platforms that explain remaining uncertainties and advise on the reliability of predictions. There is also a need for general access to standardized weather observation data.
This study provides insights that go beyond the boundary of the financial sector. The debate continues on how to design, organize and finance worldwide information architecture and related services – drawing on public and private actors, bottom up from national and regional levels and top down from a global perspective.
* This article is adapted by the WMO Bulletin from the survey report. For more information, contact Paul Clements-Hunt, Head, UNEP Finance Initiative (Paul.Clements-Hunt@unep.org), or Remco Fischer, Programme Officer (Remco.Fischer@unep.org).