Photo: U.S. Coast Guard, Petty Officer 2nd Class Kyle Niemi
Climate change affects people and the environment the world over. However, the financial community has been slow to respond to climate risk. In fact, a recent study shows that global supply chains have become increasingly susceptible to climatic shocks and pressures in recent years.
Researchers from Potsdam Institute analyzed daily economic, population and temperature data from 1991 to 2011 to assess the impact of heat stress on production losses in the construction, agriculture and fisheries and mining and quarrying industries. The study found that on a daily average, output reduced by 0.6 percent, 0.8 percent and 4.2 percent, respectively, per degree over 27° Celsius (80.6° F).
You would think that governments and corporations would diversify their supply chains to reduce the risk of localized natural disasters on the entire supply network, but the study indicates the opposite is true.
Potsdam’s researchers, using data from 186 countries, found that “existing dependencies on supply from tropical countries have become larger” especially between 2001 and 2011. “This suggests that the current evolution of the supply network might facilitate the propagation of climate-induced production losses,” conclude the reports’ authors.
In the past, international trade policies have provided countries with purchasing agreements to secure regional demand, which can jeopardize global market stability. As the authors suggest, restructuring global supply chain networks and related trade policies will likely be critical to building resilient supply chains.
Historically, credit rating agencies haven’t included climate vulnerability into credit ratings of government- or corporate-issued securities. Recently, the worlds’ biggest credit rating agencies – Standard & Poor’s and Moody’s Investors Service – are beginning to incorporate climate change into financial risk calculations.
The Financial Stability Board’s Task Force on Climate-Related Financial Disclosure (TCFD) released a report in March 2016, titled “Environmental Risks and Developments – FSB Task Force Could Begin to Clear Fog on Climate Risk Disclosures.” The report addresses the question of how the financial sector can incorporate climate risk into decision-making processes.
From a financial standpoint, the risks stem from the impact climate stressors (like droughts or hurricanes) could have on industries and companies, as well as the potential impact environmental policies, like a carbon tax, could have on corporate profits. The TCFG will release a second report outlining a set of voluntary reporting criteria that financial analysts can use to better monetize climate risk exposure.
“The report enumerates a set of fundamental principles of disclosure, which – combined with a standardized and consistent scenario analysis framework for disclosing climate-related risks, by region, industry and time horizons – could serve as a meaningful starting point for integrating more methodically climate change into our analysis of creditworthiness,” commented Moody’s Senior Vice President, Henry Shilling.
As the Potsdam Institute report indicates, governments and corporations are already experiencing financial losses associated with climate change.