© Copyright Acclimatise and Climate Risk Management Limited 2008 Is climate change a risk issue? Dr Richenda Connell Acclimatise IHT ‘Moving people changing expectations’ 2 October 2008

© Copyright Acclimatise and Climate Risk Management Limited 2008 We face two climate change challenges – mitigation & adaptation Future climate change is already built into the climate system: –40+ years of rising temperatures, changing precipitation, centuries of sea level rise… Source: IPCC AR4 SPM We have to adapt to inevitable climate change We must also take strong action to reduce emissions if we are to avoid the worst effects in the longer-term Inevitable climate change

© Copyright Acclimatise and Climate Risk Management Limited 2008 “Adaptation is the only response available for the climate change impacts that will occur over the next several decades before mitigation measures can have an effect.” Sir Nicholas Stern “The firms that will prosper in a climate-changed world will tend to be those that are: early to recognise its importance and its inexorability; foresee at least some of the implications for their industry; and take appropriate steps well in advance. The pace of a firm’s adaptation to climate change and related policy is thus likely to prove to be another of the forces that will influence whether, over the next several years, any given firm survives and prospers; or withers and, quite possibly, dies.” Dr John Llewellyn, Senior Economic Policy Advisor, Lehman Brothers "Ten years ago we were talking about these impacts affecting our children and our grandchildren. Now it is happening to us. Even if we achieve a cap at two degrees, there is a stock of major impacts out there already and that means adaptation. You cannot mitigate your way out of this problem. The choice is between a damaged world or a future with a severely damaged world." Professor Martin Parry, Co-chairman of the IPCC

© Copyright Acclimatise and Climate Risk Management Limited 2008 Decisions based on historic climate data are no longer robust [Source: IPCC AR4 SPM] Changes in physical and biological systems,

© Copyright Acclimatise and Climate Risk Management Limited 2008 What are stakeholders saying about inevitable climate change?

© Copyright Acclimatise and Climate Risk Management Limited 2008 Investors are asking difficult questions of the companies in which they invest USS, Railpen, Hendersons, Insight Investment released a report earlier this year, “Managing the Unavoidable: Understanding the investment implications of adapting to climate change” Peter Moon, Chief Investment Officer, USS –“We need more and better information about how companies and other assets will be affected so that we can make better informed decisions as to how we allocate our long-term capital.” Rory Sullivan, Head of Investor Responsibility, Insight Investment –“Adaptation has been the poor relation in the climate change debate. This project will provide us and other investors with a framework within which to analyse all of the risks - and opportunities - that a changing climate brings.”

© Copyright Acclimatise and Climate Risk Management Limited 2008 Banks are considering climate change in credit risk analysis “Changing weather patterns may impact in a variety of ways, including the physical risk to fixed assets arising from storm damage or flood, impacts on the supply chain arising from increasing scarcity of natural resources such as water, and shifting patterns in demand for goods and services due to increased extremes of temperature.” “They may impact asset values, and hence potentially weaken a company's balance sheet; they may increase costs, as raw materials or other inputs become scarce, or as operations or working practices need to change; or they may reduce the demand for a company's products or services.” “…these impacts may be valid considerations in credit risk analysis for lending banks.” Barclays Environmental Risk

© Copyright Acclimatise and Climate Risk Management Limited 2008 Insurance companies are voicing their concerns – some now refuse to insure in vulnerable locations “Insurance is in the front line of climate change…. it is insurance companies that will have the responsibility of dealing with many of its consequences. And it is insurers who must be equipped to analyse the new risks that flow from climate change, and to help customers manage these risks.” (Association of British Insurers) Weather related catastrophes and insured losses Source: ‘Financial risks of climate change’ ABI, Report prepared by Acclimatise

© Copyright Acclimatise and Climate Risk Management Limited 2008 Professional institutions are mainstreaming climate adaptation Chartered Institution of Building Services Engineers (CIBSE) provides weather data based on historical observations for building performance simulation (heating, cooling and energy) CIBSE recognise use of historical data is inappropriate for design of new buildings, because of climate change CIBSE issued guidance advocating use of ‘morphed’ weather to allow for climate change GLA is considering making this mandatory

© Copyright Acclimatise and Climate Risk Management Limited 2008 Climate change is now ‘reasonably foreseeable’ A leading law firm has stated that: –“The effects of climate change can now be regarded as being reasonably foreseeable at every stage – from initial instruction, through the design and planning process to construction and beyond. It must be incumbent upon professional advisors to ensure that appropriate steps have been taken.” This has consequences for all those with legal duties for decision making and those providing advice

© Copyright Acclimatise and Climate Risk Management Limited 2008 Climate change is a risk management issue

© Copyright Acclimatise and Climate Risk Management Limited 2008 Climate risks can be embedded into mainstream decision-making Bring ‘climate adaptation’ and ‘risk management’ worlds together Mainstream climate risks within company’s existing risk management processes Start with the strategic objectives and how these will be affected Drill down to functional levels What is this project aiming to achieve? Develop criteria for assessing risks and adaptation options, including critical thresholds & sensitivities, legislation, cost, risk attitude etc Identify risk management (adaptation) options:  No regret & low regret options  Win-win options  Adaptive management Evaluate risk management options against Stage 2 criteria How can the project ensure that it continues to deliver successfully on its objectives in the face of climate variability and climate change? What are the opportunities from climate change for the project? Bring information together Undertake final checks Undertake tiered risk assessment, drawing on latest climate change trends and future projections Evaluate against Stage 2 criteria [Source: Willows & Connell, 2003]

© Copyright Acclimatise and Climate Risk Management Limited 2008 Identify climatic linkages to business success criteria Identify critical success criteria and the causal chain linking them to climatic factors Consider risk attitude: optimistic, precautionary (‘risk averse’), least regret Success criteria Understand climatic vulnerabilities Identify critical climatic thresholds and sensitivities Identify key risks: –Observed climatic trends & variability –Latest climate change science UKCIP08 [Source: Willows & Connell, 2003]

© Copyright Acclimatise and Climate Risk Management Limited 2008 Cost/income pressures on free cash due to unmanaged climate risks Changing climate risks should be incorporated into financial models Importance of cash flow forecasting Impact on profit of small % increase in operating costs Impact on profit of decrease in income No provision for unplanned additional investment Effect on investor confidence Proactive adaptation can save money: The World Bank and the US Geological Survey estimate that economic losses worldwide from natural disasters in the 1990s could have been reduced by $280bn if $40bn had been invested in preventative measures

© Copyright Acclimatise and Climate Risk Management Limited 2008 Useful strategies for decision-making in the face of uncertainty 45 ‘No regret’: Deliver benefits that exceed their costs, whatever the extent of climate change  E.g. Preparing for questions from investors, analysts, lenders, lawyers etc  E.g. If already experiencing weather-related problems, carry out cost-effective actions to deal with them ‘Low regret’: Low cost, potentially large benefits under climate change  E.g. Building climate change in at the design stage for new cooling systems ‘Win-win’: Measures that contribute to climate adaptation and also deliver other benefits ‘Flexible/adaptable’: Keep open / increase options that allow climate adaptation in future, when need for adaptation and performance of different measures is less uncertain  E.g. Flood management: It may be sensible to allow for future increases in defence height, while not building to a higher standard immediately

© Copyright Acclimatise and Climate Risk Management Limited 2008 Thank you