The Heat Is Online

Climate Damages of $150 Billion Per Year Foreseen Within Decade

Climate change costs seen at $150B a year

Planetark.org, Oct. 8, 2002

LONDON - More frequent and more devastating storms caused by climate change could cost $150 billion a year within the next ten years, possibly bankrupting financial services firms, a United Nations-backed report warned yesterday.

"The increasing frequency of severe climatic events...has the potential to stress insurers, reinsurers and banks to the point of impaired viability or even insolvency," the report said.

The report said a political framework for action on climate stability is essential, but said the Kyoto Protocol, under which many industrial nations except the United States committed to curb greenhouse gas emissions by 2012 does not go far enough.

Written on behalf of the UN Environment Programme's (UNEP) finance initiative, the report said financial institutions could deliver market solutions to climate change, through carbon emissions trading and lower insurance premiums for cleaner companies.

"A pro-active stance by financial institutions will help to reduce the threats they face from climate change while also providing opportunities," the report said.

Worldwide economic losses from natural disasters appear to be doubling every ten years, the report said, and called for action to decrease the emission of greenhouse gases, particularly carbon.

LITTLE COMMITMENT

Although they are directly at risk, the reaction of financial services firms to the problem of climate change has so far been patchy, the report said, while governments have shown little commitment to tackling the problem.

The report said that while climate change is widely recognised as being a threat by insurers and reinsurers, their strategies towards it have been mixed.

Very few insurers, for example, factor in climate change-related risks into their insurance premiums, the report said.

In the commercial banking industry it said there appeared to be little awareness of the issue among senior executives, though some companies have seized the opportunity to take the lead in greenhouse gas credit trading and energy efficient loans.

Fund managers do not currently regard climate change as an investment risk, though socially-responsible fund managers consider climate change when choosing their investments. But the criteria used tend to be very crude, the report said.

The report called on financial services companies to raise awareness of the problem of climate change and to lead by example in corporate environmental management. They should also provide products and services that support adaptation and mitigation of climate change.

It said governments should commit to emissions reductions measures that put a price on carbon and stimulate demand for products in the emissions trading market.

The report was written by Innovest Strategic Value Advisors, a U.S.-based investment research firm specialising in environmental and social issues, on behalf of the UN Environment Programme's Finance Initiatives' Climate Change Working Group.


Story by Simon Challis, European Insurance Correspondent

REUTERS NEWS SERVICE

UNEP NEWS RELEASE,Oct. 8, 2002

Financial Sector, Governments and Business Must Act On Climate Change or Face Consequences

ZURICH/NAIROBI, 8 October 2002 - Too few financial companies including banks, pension funds and insurance companies are taking the risks and opportunities posed by climate change seriously, members of the United Nations Environment Programme's (UNEP) Finance Initiative are warning.

Losses as a result of natural disasters appear to be doubling every decade and have reached one trillion US dollars in the past 15 years. Annual losses, in the next 10 years, will reach close to $150 billion if current trends continue.

The massive economic losses stemming from the devastating summertime flooding in central Europe are in line with the kinds of increasingly severe weather events anticipated by scientists as a result of human-induced climate change. This year has also seen a failure of the monsoon in Asia, dramatic forest fires in the United States and the onset of another El Nino event in the Pacific.

Members of the UNEP Finance Initiatives, a unique partnership between UNEP and 295 banks, insurance and investment companies, argue that climate change-driven, natural disasters have the potential to wreak havoc across the world's stock markets and financial centres.

"The increasing frequency of severe climatic events, threatening the social stability or coupled with significant social costs, has the potential to stress insurers, reinsurers and banks to the point of impaired viability or even insolvency", the report, Climate Change and the Financial Services Industry, says.

The property market, where loans for houses and buildings are made over relatively large periods, could be particularly vulnerable as a result of extreme weather events. Homeowners and companies with property holdings may find that their insurance cover is cancelled at short notice, leaving them highly exposed.

Government action to arrest the problem will inevitably mean a reduction in emissions of the main sources of greenhouse gases linked with global warming. This will require cut backs and the more efficient use of fossil fuels such as coal and oil.

Asset managers, such as pension funds which are slow to appreciate the climate change threat, may see the value of energy or power company holdings decline as investors become more aware of the liabilities linked with carbon intensive industries, the report further concludes.

Yet opportunities are emerging that should allow the financial services industry to reduce or hedge against the risks and even help curb emissions of the greenhouse gases linked with the destabilization of the Earth's climate and weather systems.

The report says that the annual market in trading greenhouse gases, emerging as a result of international agreements to reduce emissions, could be worth as much as $2 trillion by 2012. The market for clean energy could stand at $1.9 trillion by 2020, according to some estimates.

Meanwhile, the financial services industry, with over $26 trillion in assets under management, could, if mobilized, "wield significant influence over future economic development, and therefore, the future global greenhouse gas emissions" for the benefit of itself and society as a whole.

However, a survey of mainstream financial institutions carried out for the report indicates that most are "unaware of the climate change issue" or have adopted a "wait and see policy".

These attitudes are due to the prolonged wrangling over the Kyoto Protocol, the international treaty designed to deal with the threat of global warming, compounded by practical issues like the lack of solid information on emissions and delays in finalizing the regulations of the new greenhouse gas markets.

As a result, only a small group of forward-looking financial companies are addressing the issue, many of whom are reinsurers whose businesses are already feeling the economic impact of rising, weather-related, insurance claims.

Klaus Toepfer, UNEP Executive Director, said today at the launch of the report: "This report is a wake up call for the global financial community. It highlights the real risks and economic perils they are facing as a result of human-influenced climate change. It also highlights how the industry can make a real difference through harnessing the new market instruments and mechanisms made possible by the Kyoto Protocol and by developing their own imaginative solutions."

"It also underscores how, given the financial muscle available to them, these institutions could move markets and minds to deliver a cleaner, healthier and less vulnerable world for the benefit of the world economy, for the benefit of people everywhere", he said.

The report and its studies, supported by a group of the world's biggest banks, insurers and re-insurers, were launched today at the Swiss Re Greenhouse Gas Conference in Zurich, Switzerland. The findings will also be presented to Governments at the next round of climate change negotiations set to commence in New Delhi, India, on 23 October until 1 November.

"In addition to the emitting industry needing to take a carbon constrained future into account", concluded John H. Fitzpatrick, CFO and member of the Executive Board of Swiss Re, "the financial services industry, of which we are a part, also has an obligation to contribute to the solution of these problems through its own investments and business expertise. After all, climate change and substantial emissions reductions -- like any other strategic global business challenge -- ultimately becomes a financial issue. The problems associated with environmental disasters quickly become measured in dollars and cents. Our industry needs to lead by developing

financial solutions and risk mitigation techniques to assist our clients in achieving global emission reductions."

The report has drawn up a blueprint for action, designed to galvanize the financial services industry to address the climate change threat more directly. The blueprint is also aimed at assisting Governments to create the right conditions for the industry to operate swiftly and effectively in delivering new climate-related businesses and markets.

Recommendations include urging insurers and re-insurers to better reflect the risks from climate-related perils in policies and to develop public/private partnerships in high-risk areas so that cover can be maintained.

Commercial banks should fully price risks from climate change into loan agreements and give incentives to schemes that encourage energy efficiency or cleaner fuels. Asset managers, such as pension funds, should request the companies in which they invest better information on their carbon emissions and their exposure to greenhouse gases.

Accountants, actuaries, analysts, credit rating agencies and others providing professional services should help corporate clients to better understand the threats and opportunities of climate change. Greenhouse gas trading markets need standardized accounting methods to operate and is thus another area where professional people and their professional organizations can help.

Meanwhile, governments are urged to adopt a long term, global plan, to keep greenhouse gases at safe levels. This is vital because the Kyoto Protocol runs out in 2012 whereas carbon dioxide, methane and the other greenhouse gases can persist in the atmosphere for many tens of decades.

At home, Governments should also take a variety of actions including a clear commitment on how greenhouse gas reduction targets will be met alongside economic incentives for investing in clean energy schemes and clean energy research and development.

Governments are also asked to work with stock market regulators to help boost understanding of the impacts of global warming on publicly listed companies and new offerings.

The report concludes by calling for a major drive to mobilize the financial sector on this issue and recommends that new financial techniques and methods are developed to help investors and project financiers factor in climate change into the valuation of their assets.

Notes to Editors: The UNEP Finance Initiatives is a partnership between UNEP and 295 financial institutions worldwide.

The report, Climate Change and the Financial Services Industry, was prepared by Innovest Strategic Value Advisors of Richmond Hill, Toronto, Canada, under the direction of the UNEP FI Climate Change Working Group which comprises: Andlug Consulting; Citigroup; Corporacion Andina de Fomento; Dresdner Bank AG; Gerling Sustainable Development Project GmbH; Munich Reinsurance Company; Prudential; SAM Sustainable Asset Management; and Swiss Re.

It is available on-line in PdF format from 8 October at www.unepfi.net. For more information, please contact: Eric Falt, UNEP Spokesperson/Director, Division of Communications and Public Information,in Nairobi on tel: +254-2-623292, mobile: +254-733-682656, e-mail:eric.falt@unep.org or Nick Nuttall, UNEP Head of Media, on tel:+254-2-623084, mobile: +254-733-632755, e-mail: nick.nuttall@unep.org

In Europe: Robert Bisset, UNEP Spokesperson for Europe, on tel:+33-1-4437-7613, mobile: +33-6-2272-5842, e-mail: robert.bisset@unep.fr

Climate Related Perils Could Bankrupt Insurers

ZURICH, Switzerland, October 7, 2002 (ENS) - Climate change is causing natural disasters that the financial services industry must address, a group of the world's biggest banks, insurers and re-insurers warned today. They estimated the cost of financial losses from events such as this summer's devastating floods in central Europe at $150 billion over the next 10 years.

"Climate Change and the Financial Services Industry," a report supported by 295 banks and insurance and investment companies, was launched today at the Swiss Re Greenhouse Gas conference in Zurich.

A partnership between the United Nations Environment Programme (UNEP) and the financial institutions, known as UNEP Finance Initiatives commissioned the report. It shows that losses as a result of natural disasters appear to be doubling every decade and have reached $1 trillion in the past 15 years.

"The increasing frequency of severe climatic events, threatening the social stability or coupled with significant social costs, has the potential to stress insurers, reinsurers and banks to the point of impaired viability or even insolvency," the report concludes.

John Fitzpatrick, CFO and member of the Executive Board of Swiss Re, said, "Climate change and substantial emissions reductions - like any other strategic global business challenge - ultimately becomes a financial issue. The problems associated with environmental disasters quickly become measured in dollars and cents. Our industry needs to lead by developing financial solutions and risk mitigation techniques to assist our clients in achieving global emission reductions."

"In addition to the emitting industry needing to take a carbon constrained future into account," Fitzpatrick said, "the financial services industry, of which we are a part, also has an obligation to contribute to the solution of these problems through its own investments and business expertise."

Linked to heat-trapping emissions from the combustion of coal, oil and gas, the environmental implications of global warming are serious. Melting polar ice caps and glaciers, rising sea levels, distorted weather patterns, and drought are widely forecast. Coastal cities, crops, and animal habitat could be destroyed.

But too few financial companies are taking the risks and opportunities posed by climate change seriously, a survey of mainstream financial institutions carried out for the UNEP Finance Initiatives report indicates. Most are "unaware of the climate change issue" or have adopted a "wait and see policy."

These attitudes are "due to the prolonged wrangling over the Kyoto Protocol," the report states, compounded by "the lack of solid information on emissions and delays in finalizing the regulations of the new greenhouse gas markets."

The protocol, agreed under to the United Nations Framework Convention on Climate Change, limits the emission of six greenhouse gases linked to global warming. Thirty-nine industrialized nations were to have been governed by the original agreement signed in Kyoto, Japan in December 1997, but the Bush administration said in 2001 that the United States would not ratify the protocol, and Australia followed suit this summer. It still has not entered into force.

A small group of financial companies is addressing the issue, but many of them are reinsurers whose businesses are already feeling the economic impact of rising, weather related, insurance claims.

"This report is a wake up call for the global financial community. It highlights the real risks and economic perils they are facing as a result of human influenced climate change," said UNEP Executive Director Klaus Toepfer.

The property market, where loans for houses and buildings are made over relatively long periods of time, could be particularly vulnerable as a result of extreme weather events, the report warns. "Homeowners and companies with property holdings may find that their insurance cover is cancelled at short notice, leaving them highly exposed."

Government action to arrest the problem will "inevitably" mean a reduction in emissions of the main sources of greenhouse gases linked with global warming, predicts the report. This will require cutbacks and the more efficient use of fossil fuels such as coal and oil.

Asset managers who are slow to appreciate the climate change threat "may see the value of energy or power company holdings decline" as investors become aware of the liabilities linked with carbon intensive industries, the report concludes.

Recommendations in the report's "blueprint for action" include urging insurers and re-insurers to better reflect the risks from climate related perils in policies and to develop public/private partnerships in high risk areas so that cover can be maintained.

Commercial banks should fully price risks from climate change into loan agreements and give incentives to schemes that encourage energy efficiency or cleaner fuels.

Greenhouse gas trading markets will need standardized accounting methods to operate, an area where financial professionals can contribute to solving the problem.

"Given the financial muscle available to them," said Toepfer, "these institutions could move markets and minds to deliver a cleaner, healthier and less vulnerable world for the benefit of the world economy, for the benefit of people everywhere."

Governments are urged to adopt a long term global plan to keep greenhouse gases at safe levels. This is "vital" because the Kyoto Protocol runs out in 2012, the report points out, whereas "carbon dioxide, methane and the other greenhouse gases can persist in the atmosphere for many tens of decades."

The report was prepared by investment research and advisory firm Innovest Strategic Value Advisors of Toronto, Canada, under the direction of the UNEP FI Climate Change Working Group – Andlug Consulting, Citigroup, Corporacion Andina de Fomento, Dresdner Bank AG, Gerling Sustainable Development Project GmbH, Munich Reinsurance Company, Prudential, SAM Sustainable Asset Management, and Swiss Re.

"Climate Change and the Financial Services Industry" is available online at: http://www.unepfi.net