Insight & Analysis

Climate change and the treasurer

Published: Mar 2020

Climate change is not only real, it’s also a serious threat to businesses across the globe. Treasurers are constantly adapting their roles to include new responsibilities, and tackling climate-related financial risks is often one of them.

Glass globe sitting on plants and grass

As climate-related disasters wreak havoc across the globe, businesses are having to submit record-high insurance claims for damage to property, supplies and more. In an Interview with The New York Times, Rostin Behnam, a top financial regulator in the US, suggested that the potential damage from climate change could be just as severe as the fallout from the mortgage crisis that triggered the 2008 financial crash.

The level of global economic loss from extreme weather events has steadily increased over the past few decades, according to data from the Bank of England, and it’s noted that losses from severe weather can go on to have further effects on the wider economy. For example, excessive flood damage could cause a fall in house prices, reducing the wealth of homeowners, thereby having a knock-on effect on overall spending in the economy.

It won’t get better

Seth Rachlin, Executive Vice President, Chief Innovation Officer, Insurance at Capgemini doesn’t believe this is going to get any better. “The costs are going up and businesses will be paying more for insurance because the risk environment has changed.” Flooding, especially, is becoming an issue for homeowners and businesses alike, as areas that were not traditionally flood-exposed are now at risk. Japan’s insured losses from Typhoon Hagibis are said to be “minimally in the billions”. But fire damage is also a major concern. The California wildfires in 2019 are estimated to have caused more than US$100m in economic damages. This is dwarfed by Australia’s recent natural catastrophe, where damage is expected to top US$100bn.

Treasury’s role

The role of the treasurer in the wider organisation is rapidly expanding. Rachlin explains that a treasurer, as part of the financial management of an enterprise, plays a role in pushing to identify financial risks and understanding the various trade-offs of insurance versus internal protection versus retained risks, and then helping to articulate and form a strategy of defence.

Key to managing these risks are holistic responses such as managing an effective insurance programme, as well as reinforcing physical defences around the appropriate areas. These areas include all properties and locations – regardless of where they are. Rachlin adds that alongside that, companies also need to look more broadly and understand the physical risk of the entire supply chain. “For example, if a major supplier is located in a risky location and that supplier floods or is damaged and out of commission for days or weeks, what is the potential impact of that?”

Risk management

Basic risk management strategies can be from a construction perspective to mitigate floods, storms, wildfires and so on. For example, the International Commerce Centre building in Hong Kong is designed to sway in typhoon winds, whilst there are various materials that can help a building better withstand fire damage. It’s also common to locate a business where there’s a lower risk of exposure to extreme climate events, but as Rachlin points out, these events are now happening in areas that were not traditionally exposed.

There are plenty of companies offering tools to help organisations manage risk, and they are becoming increasingly sophisticated as technology advances. In the example of flood risk, Rachlin notes that “traditionally, flood risk has been almost map-driven, where various geographies are cut into broad zones and then those zones have a level of flood risk”. Now though, most major risk management model providers have “high definition” models that rather than estimating risk on a “coarse-grain” level, do so on a “fine grain” level, and therefore can understand far better the risk of very specific geographic locations. This allows companies to act upon it both with regards to the level of insurance to purchase but also the “shoring up” of physical structures.

Unintended side-effects

Significant events – climate or otherwise – have ripple effects that are not always immediately obvious, and so treasurers need to work with risk managers and insurance companies to ensure that the business is as protected as possible.

“I think that when a treasurer, or anyone that’s concerned with the financial wellbeing of an organisation, looks at this question, they need to understand the full geographic dimension of their risk, and the risk management tools and models that enable you to do that,” concludes Rachlin.

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