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Elemental: Climate change, data and the financial sector: UNSW lecture
- 1. 0 © Climate Policy Research P/ L 2016 + “…catastrophic norms of the future can be seen in the tail risks of today.” Dr Nick Wood, Climate Policy Research Kate Mackenzie Head of finance and investment at The Climate Institute Elemental: Climate change and the financial sector
- 2. 1 © Climate Policy Research P/ L 2016 + Disclaimer © 2016 Climate Policy Research Pty Ltd, ABN: 65 601 597 657 The information stated in this briefing note is generic and is not related to the situation of any particular person or entity. Climate Policy Research Pty Ltd endeavors to provide timely and accurate information. However, it provides no guarantee that the information is accurate and takes no responsibility for the consequences of anyone acting upon the information. It is the responsibility of the user to seek appropriate professional advice relating to their particular situation. UNSW GCCW – DRAFT
- 3. 2 © Climate Policy Research P/ L 2016 + Who are we? Dr. Nick Wood Director, Climate Policy Research Nuclear physics and atmospheric chemistry Advisor on climate policy to Government and business Kate Mackenzie Head of finance and investment at The Climate Institute, an independent, non-partisan thinktank. Previously: Financial Times writer on energy and finance including FT Alphaville
- 4. 3 © Climate Policy Research P/ L 2016 + Elemental The world of finance Data from climate models ?
- 5. 4 © Climate Policy Research P/ L 2016 + A brief overview of finance decision-making Lenders and borrowers Regulation and supervision Information flows Investors and market analysis
- 6. 5 © Climate Policy Research P/ L 2016 + The basics Banking Lend to people who can pay you back Risk management Keep enough cash on hand to stay solvent if the loans turn bad Run enterprise wide risk models - based on historical data Investing (equity - company shares) Buy shares in business that grow and make a profit Decisions based on established theories and practices + analytics mostly derived from historical data Risk management Track the performance of businesses to identify issues Monitoring governance, processes etc.
- 7. 6 © Climate Policy Research P/ L 2016 + Corporate regulation (non-financial) To ensure that financial markets are fair and transparent, supported by confident and informed investors and consumers. ASIC is not there to: Prevent poor investment decisions Reduce investment risks Investors are responsible for their own decisions Australian Securities and Investments Commission
- 8. 7 © Climate Policy Research P/ L 2016 + Financial sector regulation: an extra layer Banks, super funds, insurers are subject to extra supervision, on top of ASIC standards Why? Because they’re important to the wider economy Failure is okay, as long as it’s “orderly” – which means information is critical Definitely want to avoid a “Run on the bank” Australian Prudential Regulation Authority Example: bank capital ratios For every $100 of (risk weighted) assets (aka debts owed), you need to hold $8 of reserves
- 9. 8 © Climate Policy Research P/ L 2016 + Where does climate risk fit in? TODAY: Climate risk is mostly handed via “environmental, social and governance” or “Sustainability” functions Investor side: “ESG” - focus is traditionally on products to meet client demand – those who want green, ethical, etc. Corporate side: “Sustainability” – focus is on public-facing information, managing stakeholders, absorbing public discord Where is “risk” handled?
- 10. 9 © Climate Policy Research P/ L 2016 + FSB Taskforce on Climate-related Financial Disclosure Physical Loss arising from damage Decreased utility due to changing climate Transition Policy/regulation, eg “stranded assets” Market preferences Technological disruption Liability Failure to mitigate Derives from Physical OR Transition risks Not just insurance sector
- 11. 10 © Climate Policy Research P/ L 2016 + Risks from a changing climate Climate data – a different future emerges Open source data Hostile analytics Predictive exposure vs. voluntary planned disclosure
- 12. 11 © Climate Policy Research P/ L 2016 + What do you see? A drying lake But.. information about future risks? http://climate.nasa.gov/system/gallery_images/large/Lake-Urmia-Iran-2000-2014_1920px.jpg Lake Urmia, Iran, 2000 to 2014, NASA images
- 13. 12 © Climate Policy Research P/ L 2016 + What do you see? • Detailed information about future rainfall • At the scale of a cattle property, a railway, a mine or a city • Intelligence suitable for risk analysis • Open source! https://www.climate.gov/news-features/featured-images/heavy-downpours-more-intense-frequent-warmer-world National Oceanic and Atmospheric Administration and the Department of Commerce, USA.
- 14. 13 © Climate Policy Research P/ L 2016 + Now consider this..1:30 year event 0 0.5 1 1.5 2 2.5 1 10 100 1000 Floodevent(m) Return period (years) Assumed flood event current climate (m) Actual flood event current climate (m) EXAMPLE ONLY
- 15. 14 © Climate Policy Research P/ L 2016 + In increase in variance: Drought Cost$ $0 Water supply Cost of low variance Water demand Cost of high variance
- 16. 15 © Climate Policy Research P/ L 2016
- 17. 16 © Climate Policy Research P/ L 2016 + Hostile Analytics Climate data is open source! Online tools are being developed A challenge to corporate traditional risk management
- 18. 17 © Climate Policy Research P/ L 2016 + Hostile analytics already exist in several sectors and markets
- 19. 18 © Climate Policy Research P/ L 2016 + “With new sources of intelligence available, people find new ways to exploit it for an advantage.” - DigitalGlobe president Tony Frazier Shopping mall in Kansas
- 20. 19 © Climate Policy Research P/ L 2016 + This has only just started
- 21. 20 © Climate Policy Research P/ L 2016 + Integrating climate data into financial risk management…
- 22. 21 © Climate Policy Research P/ L 2016 + Domestic lending How to create systemic risks in the finance sector with residential mortgages Part II
- 23. 22 © Climate Policy Research P/ L 2016 + “Approximately a quarter of the respondents indicated that they expect insurance would bear the cost of rising sea levels”. CSIRO Research Domestic lending High tide: Whale Beach, 2100
- 24. 23 © Climate Policy Research P/ L 2016 + Caution… High tide – Collaroy 2100
- 25. 24 © Climate Policy Research P/ L 2016 Collaroy: A watershed moment Approximate number of general insurers in Australia that will cover acts of the sea: 0 General insurance doesn’t cover the inevitable!
- 26. 25 © Climate Policy Research P/ L 2016 + A systemic risk in the property sector? Property buyers / investors • Require long term loan facility and long term insurance cover Insurance • Short term renewal cycles • Concern over resilience and risk Banks - home loan providers • Require insurance • Not able to track the cover linked to loans
- 27. 26 © Climate Policy Research P/ L 2016 + Systemic risk via housing, insurance, mortgages
- 28. 27 © Climate Policy Research P/ L 2016 + Disclosure vs. Exposure “It’s critical that industries and investors understand the risks posed by climate change, but currently there is too little transparency about those risks”. Michael Bloomberg, Chair, Task force on Climate related Financial Disclosures (FSB TCFD)
- 29. 28 © Climate Policy Research P/ L 2016 If it keeps on rainin' levee's goin' to break If it keeps on rainin' levee's goin' to break When the levee breaks I'll have no place to stay. Lyrics from “When the Levee Breaks” By Led Zeppelin
- 30. 29 © Climate Policy Research P/ L 2016 nickwood@climatepolicy.com.au kmackenzie@climateinstitute.org.au
Editor's Notes
- Banks: Keep enough cash/equivalents on hand so that in event of defaults, you remain solvent – ie, can pay out your depositors on demand Investors: Risk is mostly within the investee company, which in turn is affected by many factors… Often done by agents, or more accurately, a whole chain of agents. Incentives for those agents to stay within the pack
- This is key… INFORMATION with which investors can make decisions, and timely & full DISCLOSURE of that information.
- Financial insts are the critical infrastruture to an economy: thet match savers and borrowers, and (in case of insurers particularly) they manage risk
- If you ask about climate risk – that’s where you’ll be referred.
- The map at right shows predicted changes in the annual number of days of extreme rainfall (defined as rainfall totals in excess of the historic 98th percentile) across the United States by 2041-2070 as compared to 1971-2000 if greenhouse gases continue to increase at a high rate (A2 scenario). By mid-century, some places could experience two or more additional days per year on which the rainfall totals exceed the heaviest rains historically experienced in the area.
- CC is often seen as a gradual, steady, incremental shift. We know more about effects on “trends” than on volatility/variance [KM – look up research indicating CC in #1 concern for 30% of agricultural business]
- [Mention Moody’s / S&P ?]
- Genscape flies helictopters with heat-sensing cameras over oil storage facilities at Cushing, Oklahoma. The amount of oil in storage here is a key factor in price movements for the West Texas Intermediate benchmark. The company also monitors ships movements, and electricity consumption via sensors near transmission lines, etc. It charges $90k a year for its reports.
- This image from another company called RS Metrics
- [Get CoastAdapt image for Collaroy]
- Collaroy coastadapt image shows very little – but look at the damage
- This is Nick’s diagram – so this is how a nuclear physiciast thinks about the problem
- This is how Bank of England staff think about the problem
- Disclosure of downside risks is NEVER done voluntarily.