The big news of last week was the agreement of the rules on climate disclosure bill for large Californian companies by the Assembly. The Climate Corporate Data Accountability Act is now in the hands of California’s Democratic Governor to see if it passes into law – if it does that means mandatory climate risk disclosure across the worlds fifth largest economy.
What makes this important is that if a company is required to implement measures for reporting in one jurisdiction, it’s often easier to implement measures company wide. That means transformational change not simply in California, but elsewhere. What it also does is raise expectations for the SEC’s highly anticipated guidance on climate risk disclosure.
Insurance faces rising costs in the face of extreme weather
Pressure for action on disclosure is increasing, despite the political rows surrounding it. Verisk released new modelling data showing that the global modelled insured average annual loss from natural catastrophes is $133 billion – a new high. Not only should the insurance industry be prepared to experience total insured losses from natural catastrophes well in excess of $100 billion every year, but annual losses greater than $200 billion are also plausible. Not only does this reflect the growing risk of natural catastrophes, but opens up questions about how the insurance sector – and what its prepared to insure and to finance – is going to change.
While the increase in losses is in large part due to the increase in replacement costs, driven by inflation, climate change and extreme weather is playing an increasingly important role. The insurance industry accepts that climate change plays a role increased losses but this is often played down. The re-insurance industry is a bit clearer – the latest iteration of ‘Reinsurance Banana Skins’, biennial research carried out by PwC and CSFI reveals reinsurers’ views on the urgent risks they face – and climate change was deemed the most significant.
What’s interesting to note is that the modelling shows that thunderstorms are responsible for 70% of insured losses. The question then becomes of what happens regarding uninsured losses.
Verisk said that the global insured losses only make up approximately a third of global economic losses. The company estimates that annual economic losses could exceed $400 billion, a staggering figure that highlights the insurance protection gap that exists around the world.
New approaches are being undertaken to help manage the problem. Commercial property insurer FM Global for example announced its second consecutive resilience credit to support client investment in climate resilience solutions. The resilience credit, collectively worth approximately $350 million, will be shared among FM Global’s clients, providing them with additional resources to guard against extreme weather hazards such as wind, flood and wildfire.
The new allocation builds on the success of FM Global’s first-ever resilience credit in 2022. Following allocation of the 2022 resilience credit of US$300 million, FM Global clients accelerated implementation of natural hazards-related recommendations, driving a potential reduction in economic impact of up to US$20 billion. Over the last year, FM Global clients leveraged the resilience credit to invest in a variety of risk mitigation efforts, including flood protection projects such as levees, walls or specialized doors; fire breaks to shield against wildfires; and reinforced roofs for extreme snow.
Pricing carbon continues to rise up the agenda
Following Africa Climate Week, the Nairobi Declaration included a call for a global carbon tax as a mechanism for addressing both climate risk and the continent’s debt burden. Agreed as the framework for a negotiating position at COP28, the need for climate finance and the focus on working with oil states looks set for a major battle.
The importance of managing climate risk and the debt crisis in the region cannot be underestimated. The latest multi-agency report coordinated by the World Meteorological Organization (WMO), the United in Science report, which makes a systematic examination of the impact of climate change and extreme weather on the Sustainable Development Goals (SDGs), was released in the run up to the UNGA meeting. It says only 15% of the Sustainable Development Goals (SDGs) are on track.
The report illustrates how weather, climate and water-related sciences can advance aims such as food and water security, clean energy, better health, sustainable oceans and resilient cities. At the half-time point of the 2030 Agenda, the science is clear – the planet is far off track from meeting its climate goals. This undermines global efforts to tackle hunger, poverty and ill-health, improve access to clean water and energy and many other aspects of sustainable development.
The annual report combines input and expertise from 18 organizations and is issued ahead of the SDG Summit and Climate Ambition Summit at the United Nations General Assembly. “2023 has shown all too clearly that climate change is here. Record temperatures are scorching the land and heating the sea, as extreme weather causes havoc around the globe. While we know this is just the beginning, the global response is falling far short. Meanwhile, halfway to the 2030 deadline for the Sustainable Development Goals (SDGs), the world is woefully off-track,” said UN Secretary-General António Guterres.
Tools for addressing climate risk are on the increase
This week saw news that a unit of Zurich Insurance Group (Zurich), and KPMG Switzerland, a leading professional services firm, have formed a strategic collaboration to offer advisory services to address physical and transition risks, respectively, associated with climate change. The offering is initially available in Switzerland and later in other markets across Europe, the Americas and Asia Pacific regions.
The company said “The frequency, duration and severity of extreme weather events have increased and pose a growing threat to businesses and communities around the world. Consumer behaviour is shifting towards more climate-friendly products and services, while investors and regulators are demanding more sustainable business practices and transparent reporting from companies.”
This new offering combines Zurich Resilience Solutions’ physical risk assessment with KPMG’s transition risk assessment capabilities. It enables businesses to better understand and manage their exposures, while also strengthening physical and operational resilience, to develop transition strategies to a low-carbon economy, and to seize opportunities.
Managing consultancy Boston Consulting Group (BCG) announced a new strategic partnership with Doconomy, a provider in climate technology, aimed at supporting financial institutions in the development of their sustainability agendas. Doconomy has developed an ecosystem of financial tools to enable users to make environmentally sustainable financial decisions.
Among Doconomy’s tools is the Åland Index, a cloud-based impact as a service for CO₂e and H₂O calculations for all digital financial transactions. Through the collaboration, BCG and Doconomy intend to leverage their complementary strengths and deliver strategic insights and robust tech solutions to clients, enabling them to enhance their ability to deliver sustainable impact.
Carbon markets continue to thrive
The need for accelerated action, for carbon removal as well as mitigation, is driving interest in the CO2 removals market, according to the latest research from BCG. The report looks at the long term and durable removal of CO2 from the atmosphere, with technologies including Direct Air Carbon Capture and Storage (DACCS), Biomass with Carbon Removal and Storage (BiCRS), Enhanced Weathering/Carbon Dioxide Mineralization, and Ocean Alkalinity Enhancement.
The report looks at low, medium and high demand scenarios over 2030 to 2040 which range from roughly 40-80 million tonnes to 200-870 million tonnes, with a market value of up to $135 billion. What’s most interesting about the report is that currently announced projects would only be able to deliver around 33 million tonnes of removal.
In other carbon removal news, Amazon.com (NASDAQ:AMZN)) announced its first investment in direct air capture (DAC) technology, announcing its commitment to acquiring 250,000 tons of removal credits over 10 years. Amazon will secure these credits from the 1PointFive direct air capture (DAC) plant in Texas, a project developed by Occidental’s Oxy Low Carbon Ventures subsidiary.
Increased climate funding focus from philanthropy to venture capital
The Rockefeller Foundation announced—as the pinnacle of its new climate strategy— that it plans to invest more than $1 billion over the next five years to accelerate climate action and promote universal opportunity. Moving forward, Rockefeller says it will leverage every part of its Foundation—including resources, convenings, and voice—to help transform the four systems that are essential to the well-being of people and the planet: energy, agriculture, health, and finance.
The new strategy, which is the first of its kind in The Rockefeller Foundation’s 110-year history, has two central pillars: bring the world together to address climate change in a more concerted manner and seize the climate transition’s opportunities and benefits for the billions of people who have historically been denied them. As part of this new commitment, The Rockefeller Foundation will also prioritise achieving a science-based Net Zero standard for its operations globally.
Meanwhile Galvanize Climate Solutions a global climate-focused investment firm, announced the final close of its Innovation + Expansion Fund at over $1 billion. With commitments from a diverse set of institutional investors, including leading endowments, foundations and family offices, the Fund is one of the largest climate venture funds raised to date. The Fund will target investments in early- to growth- stage climate companies that drive timely decarbonization, providing both capital as well as interdisciplinary resources to help accelerate the path to commercial scale.
Biodiversity has got one of its first venture capital firms, with the launch of Superorganism. Its unique as its proposing to donate 10% of its profits towards conservation measures. The Nature Conservancy estimated that $700 billion will be needed to reverse the global biodiversity crisis to 2030 – and Superorganism intends to help fill that gap.
SGX Group and BlackRock have launched a climate action ETF, catalysing sustainable investing in Asia. The ETF will track the MSCI AC Asia ex Japan Climate Action Index, which is part of the suite of MSCI Climate Action Indexes launched in end 2022. The Indexes favour a bottom-up approach and select the top 50% of companies in each GICS® sector based on the company’s carbon intensity and commitments such as science-based target setting, green revenues or opportunities, together with its climate risk management. It is the largest equity ETF launched in Singapore, with assets under management (AUM) of $426 million at launch.
And never let it be said that politicians miss an opportunity to make a point. At the G20 Leaders’ Summit in New Delhi in September 2023, the UK committed to an investment of $2 billion to the Green Climate Fund (GCF). The GCF said: “The UK has been a long-term, committed supporter of GCF, contributing to the Fund since its initial resource mobilisation period. The UK contributed £1.44bn to the GCF’s first replenishment for the period 2020-23. Today’s announcement represents a significant 12.7% increase from its commitment for GCF’s first replenishment (GCF-1).”
Green finance for mid-sized business gets a boost
Deutsche Bank and the European Investment Bank (EIB) are launching a joint programme to support mid-sized companies with their sustainable transformation ambitions. Firms with between 250 and 3,000 employees will be able to apply for long-term loans through Deutsche Bank to finance their transition to more sustainable business models. The EIB will provide guarantees covering up to 50% of the loan sum. The EIB guarantees will benefit the borrowers in full.
The cooperation will make a total of €400 million available to such companies, with at least half of the loans earmarked for financing projects that boost renewable energy production.
These guarantees are part of an EU-wide linked risk-sharing (LRS) programme, which uses risk-sharing to reduce some of the access barriers to finance caused by current economic uncertainties, such as supply chain bottlenecks, inflation, rising interest rates and insecure energy supply.
With Climate Week being held in New York alongside the UNGA meeting in the coming week, we’re likely to see some relevant financial newsflow.
