While political and social rhetoric on climate change continues to build, Australian companies are not quantifying the business risks posed by the changing environment.
According to KPMG, climate change risk management is one of a number of risks that are proving difficult to quantify. Indeed, according to Economist Intelligence Unit research sponsored by KPMG, IBM and Ace, climate change risk was ranked as being the risk least effectively managed by organisations.
“For climate change, most companies are still in the assessment stage so it is not surprising that confidence is lower in terms of ability to manage this risk as they are still working out what it all means,” said George Sutton, a partner at KPMG. “However, given the recent public scrutiny around climate change and the likelihood of a cap and trade carbon emissions scheme by 2012, climate change risk will be coming to the fore in the coming years.”
The issue of future emissions targets remains shrouded in political risk in Australia, which could explain some of the relative difficulty in quantifying the risk. Research from Aon released late last year found that many executives expect regulatory intervention as regards emissions targets. However, with a Federal election likely later this year, and a marked contrast between the emissions policies of Labor and the Coalition, any further work on climate risk may be put on hold until the election quandary is resolved.
A Labor government is likely to push for earlier and higher emission reduction targets than the current government, which could significantly alter risk assessment approaches.
While climate change risks may be difficult to quantify at present, some experts believe governance, risk and compliance (GRC) professionals should take the lead role in ‘greening’ businesses. “Environmental causes are climbing quickly up the corporate priority list, driven by pressures from regulators, investors, competitors, aggressive non-government organisations, and even, in rare cases, the enlightened altruism of boards and executives,”said Michael Rasmussen, vice-president, risk and compliance research at Forrester.
“In the most successful cases, these efforts are ingrained in the corporate culture early on by the founder or chief executive as part of their mission to be good corporate citizens. In other cases, environmental practices have had a tendency to spring up in reaction to immediate risks – whether operational, regulatory, or reputational – with little central guidance or structure. Predictably, the proactive approach yields a more structured program with more quantifiable results.”
Despite the inaction so far, climate change risk is on the radar of executives globally. According to PricewaterhouseCoopers’ (PwC) annual survey of more than 1,000 CEOs, 40 per cent expressed concern about the threat posed by climate change globally. Moreover, CEOs in the Asia-Pacific region are the most concerned, with 58 per cent worried about the risks. Just 18 per cent of North American CEOs have concerns.
The insurance industry is also becoming increasingly active in climate change risk management. A separate PwC study issued last month found that climate change is the fastest rising global risk for insurers.
“Climate change was the fastest rising risk globally and is a hot issue here in Australia,” said Kim Smith, a partner at PwC. “There is a heightened risk of loss around flood, storm and fire damage, but the real challenge for insurers is to get the models and pricing right in a rapidly changing and uncertain climate.”
Indeed, recent research from the World Wildlife Fund and insurer Allianz’s US business found that insurers have a responsibility to work with government to adjust household and flood cover rates and to send a message to business that climate change has an impact.
Insurers must “develop actuarially sound risk-based pricing that sends appropriate risk signals to consumers moving into high risk areas,” the report said. Insurers must also integrate predictions of leading climate scientists into the existing catastrophe risk models in the market.
Other suggestions in the report included insurers taking a more proactive approach to influencing land use, development and planning and incentivising the reduction of greenhouse gas emissions through differing premiums.
The report also found that climate change issues may fuel potentially huge new markets for insurers. For example, reinsurance giant Swiss Re recently developed a new insurance product, believed to the first of its kind, structured for managing Kyoto Protocol-related risk arising from carbon credit transactions for RNK Capital.
For more on how GRC can help ‘green’ companies, turn to page 14