This document summarizes key points from a presentation on climate risk given by Michel Rochette. The presentation covers physical evidence of climate change, observed and projected impacts such as rising temperatures and sea levels, government and industry efforts to address climate change, and risks to businesses from climate change including regulatory, investment, litigation, physical, and reputational risks. The presentation also discusses proposed disclosure requirements from organizations like the SEC, Carbon Disclosure Project, and Global Reporting Initiative regarding companies' climate-related risks and impacts.

1. Climate Risk
Michel Rochette, MBA,FSA
2007 SOA Annual Meeting
Enterprise Risk Advisory, LLC

2. Topics
• Physical Evidence of climate changes: risk
drivers of environmental risk
• Observed and projected physical impacts
• Government and industry efforts to face climate
change
• Risks due to climate change
• Proposed Disclosures:
– Investor Network on Climate Risk
– Carbon Disclosure Project
– SEC Proposed Requirements

3. Physical Evidence of Climate
Changes: Risk Drivers
"Periodically, major forces dramatically reshape
the business world – globalization and the
information technology –. Climate change in
its complexity and potential impact may rival
both of them.“
Michael Porter, Harvard

4. Physical Evidence of Climate
Changes: Risk Drivers
• Primary drivers: Gazes produced naturally
and by mankind create the green house
effect, trapping heat from the sun.
• From year 1000 to 1860, concentration of
Co2 has been about 300 PPM.
• Since 1860, concentration has increased
36% to 382 PPM.(2000)

5. Physical Evidence of Climate
Changes: Risk Drivers
• Greenhouse Gazes (GHG): US Perspective
– Carbon Diozide(CO2): 82.4% from energy,
transportation, & industrial processes.
– Methane(CH4): 9% mostly from waste & agriculture
– Nitrous Oxides(N2O): 5.0% from waste & agriculture
– HFCs (replaced CFCs) , PFCs, SFs: 2.2% from
refrigeration, insulation industries
– US: largest world contributor but on average when
measured by head.
– China will reach the US around 2025 but due to other
sources of more damaging GHGs.
– Source: US Energy Information Administration

6. Physical Evidence of Climate
Changes: Risk Drivers
– ALL GHG have a Global Warming Potential
(GWP) measured as a ratio of CO2:
• Carbon Dioxide(CO2): (1)
• Methane(CH4): 21
• Nitrous Oxide(No2):310
• HFCs: 140-11 700
• PFCs: 6 500 – 9 200
• SF6: 23 900

7. Physical Evidence of Climate
Changes: Major Sources of GHGs
Country/ World USA Europe China
Source (EU 25)
of GHG
Energy 40% 46% 40% 50%
Trans- 24% 31% 23% 6%
portation
Industry 19% 11% 15% 34%
Source: 2003 WRI

8. Observed Physical Impacts:
Global Temperature
• Between year 1000 and 1860, temperature
fluctuated +/- 0.5C.
• Since 1860, the warmest 10 years have occurred
since 1990, 2005 was the warmest ever.
• Average annual increase is 0.9C over the past 30y
• If trend continues, projection of an increase of
global average temperature between 1.4C and
5.8C by 2100. (9 separate scientific models
confirm that trend)

9. Observed Physical Impacts:
Global Temperature
• Increase could accelerate if other phenomenon
interact:
– Higher temperature →More intense Fires → Burn trees
which store GHG
– More deforestation → reduction in natural GHG
sequestration by forests.
– Higher temperature → thawing frozen soils → Release of
GHGs as it may contain close to 30% of carbon stored in
soils
– Combined with other natural phenomenon like volcanoes

10. Observed Physical Impacts:
Rising Sea Levels
• Higher global temperature is causing sea levels to
rise from:
– Melting of polar caps and glaciers. (30% of total annual
increase), especially Greenland.
– Expansion of the volume of the water itself because the
sea water temperature is increasing due to the higher
external temperature; thus, higher water temperature
causes water to expand. (70% of total annual increase)
• From 1870 to 2004: global increase of 200 mm.
• Currently: sea rising more rapidly at 2.6-2.7 mm +/-
0.7 mm per year globally.

11. Observed Physical Impacts:
Rising Sea Levels
• By 2100, best estimates are for sea levels to rise
by about 0.3 m. (1 foot)
• At that rate, sea increase would be 6 m over the
next 500 years.
• Consequences:
– More than 4m, every coastal city inundated.
– US northeast vulnerable due to low land and high
population density. NY more vulnerable than CA.
– Coastal erosion: Florida at risk.
– Combined with wind → more storm surges → more
flooding → more physical damage → more deaths and
health issues.

12. Observed Physical Impacts:
Hurricanes/Typhoons/Windstorms
• Higher temperature is causing more intense hurricanes due
to the warming of the oceans.
• Combined with higher sea levels, more sea surges are
expected.
• Out of the ten strongest hurricanes ever recorder in the North
Atlantic, 3 occurred in 2005.
• Property exposures at risk: Florida at 79% and NY at 61%.
• 15 property insurers insolvent after Andrew in FL in 1992.
• EX: Katrina:
– Property losses: 40.6 billion $
– Deaths over 1 200.
• National Flood program will continue to exacerbate the
potential impacts by "encouraging" people to live near the
coast.

13. Observed Physical Impacts:
Droughts and Fires
• Droughts observed in the American West: drier
weather, earlier snow melt, higher summer temp.
→ more frequent and longer wildfires.
• Since 1980, surface burned by wildfires doubled
compared to 1920-1980 period.
• Ex: 1991 Oakland/Berkeley Hills fire
– 2 billion $ in damage
– 25 lives lost, 150 people injured.
• California is the most at risk: 22 out of last 38.

14. Observed Physical Impacts:
Precipitation and Flooding
• Higher global temperatures → more water vapor in
the atmosphere → more precipitation → more
flooding → more damage.
• More physical damage in the US but more lives
lost in less developed countries:
– 50 billion $ of damage in the US in 1990s.
– Increase of more extreme precipitations in some areas:
US western regions and Eastern regions.

15. Observed Physical Impacts:
Other
• Warmer temperature →heat waves
– Extremely hot days are also three times as common now
as they were 127 years ago.
– Consequences:
• 52 000 died in 2003 in Europe.
• During the peak, 2000 dying per day in France.
• Warmer temperature → spread of diseases
– more mosquitoes carry malaria and Lyme
– More pollen in the atmosphere
– More air pollution → respiratory illnesses
– More southern diseases moving north.
• Ocean acidification → ocean chemistry → food
chain → food for population

16. Government and Industry Efforts to
Face Climate Change
UK Stern Review stated in 2006:
– Cost of doing nothing: Risk losing at least 5%
of GDP every year for ever.
– Cost of action: around 1% of GDP.

17. Government and Industry Efforts to
Face Climate Change
• 1992 United Nations Climate Convention:
sharing of information on GHGs, setting up
national policies and best practices. 191 nations.
• 1997 Kyoto Protocol:
– Legally binding reductions varying by countries.
– Most countries have committed to 8% reductions of
emissions from 1990 levels over 2008-2012.
– Different approaches to hedge:
• Clean development endorsement in developing nations: CER
• Joint implementation: ERU
• Emissions trading: EU ETS

18. Government and Industry Efforts to
Face Climate Change
• 2007 G8 Summit endorsed the idea of cuts in GHG of
50% by 2050.
• Asia-Pacific Climate Partnership.
• US initiative with 15 countries: 85% of emitters of GHG
including China and India.
• Europe adopted in 2007 a target of 20% reduction by
2020 from 1990 levels.
• UK on track to reduce by 15-18% by 2010.
• EU Emission Trading System (ETS) began operation in
January 2005.
– Cap and Trade System.
– Being discussed at the US Congress right now.
• Previous success: Remember acid rain.

19. Government and Industry Efforts to
Face Climate Change
• US Supreme Court in April 2007 that EPA has
authority to regulate GHG emissions from cars
and trucks. Considered a pollutant.
• California adopted climate change legislation to
reduce GHG to 1990 levels by 2020,
implementing caps starting in 2012 and
mandatory reporting.
• Nine North East and Mid Atlantic states have
signed the Regional Greenhouse Gas initiative.
(RGGI):
– Goal to reduce by 10% GHG to 1990 level by 2018.
– 1st regional Cap and Trade by 01-2009.

20. Government and Industry Efforts to
Face Climate Change
• US Climate Action Partnership: group of
business leaders:
– Implement cap and trade
– Development of policies to encourage zero emitting
technologies
• NAIC: Climate Change Task Force
• AIA and Ins. Inf. Institute have published
analysis papers on climate changes.
• UK Climate Change Working Party where some
actuaries are involved. Read Sept 07 Issue of
UK The Actuary.

21. Climate-Induced Risk
"Regulatory policy will set the rules of the
game that will affect how the burden will
fall.. It is time to know how you will
respond. At a minimum, all companies
should know their carbon footprint, where
their emissions are coming from and in
what amounts.“
Andrew Hoffman, University of Michigan
Co Author of Climate Change: What’s your business strategy?

22. Climate-Induced Risk
• Regulatory/Compliance risk:
– Fines for non compliance to new regulations on GHG
including new upcoming mandatory national and
regional GHG reductions as outlined.
– European operations more at risk.
– Miscalculation and lack of certification of carbon
footprint coupled with lack of disclosure.
– Less risk for US companies but:
• Affected if they have international operations in countries
covered by Kyoto even if US didn’t sign.
• In the US, must keep track of CA and North East States.
• Proposed SEC disclosures.

23. Climate-Induced Risk
• Investment and Shareholders’ Risk:
– For ins. Cos: States have the prudent person rule as it
relates to investments.
– For pension plans: fiduciary responsibility.
– Ex. 7 Billion $ pipeline in the McKenzie Valley could
be at risk if permafrost melts.
– Investor Network on Climate Risk:
• New risk policy model on climate risk.
• Seek to asses and obtain information on how companies are
managing climate related risks.
• Corporate Governance Score Card on Climate Risk.

24. Climate-Induced Risk
• Litigation risk:
– When making investments, cos could be accused of
not taking environmental issues into account.
– Lawsuits by states for non compliance, especially for
high emitters of GHGs.
– Lawsuits by shareholders for lack of planning by
Board of directors if companies suffer from climate
changes.
– Class actions suits could come when people will be
more affected: Ex. Katrina. The Maldives
– Big potential impact on D/O type insurance coverage.

25. Climate-Induced Risk
• Physical risk:
– Impact on property damage of clients of insurance
companies as well on insurers’ own properties.
– Impact business and supply chains: interruptions.
– Necessitate more extreme modeling of events even
for life insurers as indirect impacts of physical
changes will affect both lives and health: Ex. heath
waves and lack of preparedness by governments.

26. Climate-Induced Risk
• Reputation and business risk:
– Risk related to lack of climate risk preparedness/
corporate resilience/perceived inaction.
– One short-term approach is to commit to be a carbon-
neutral company.
– Proactive:
• Energy field:
– BP
– American Electric Power to build the 1st gasification power
plant.
– ConocoPhillips funding alternative fuels research.

27. Climate-Induced Risk
• Reputation and business risk:
– Proactive:
• Banking:
– HSBC has a set up a carbon offsetting program: electricity
consumed in London offset by projects in New Zealand with
wind power.
– Citigroup and BOA have committed 50 billion $ and 20 billion $
of future investments be made in sustainable business activities
over the next 10 years.
• Insurance:
– Swiss Re doing research and committing to being carbon
neutral in operations by 2013.
– AIG has become the 1st US company to adopt a corporate
climate change policy.
– Fireman Funds new “green coverage” for green buildings.

28. Proposed Disclosures
• Global Reporting Initiative:
– Principles and standards linking
environmental, social and economic
performance.
– GOAL: Sustainability reporting which allows
investors to assess the capacity of companies
to create value in a resource-constrained
world, including their impact on the climate.

29. Proposed Disclosures
• Carbon Disclosure Project:
– Now at CDP5: sent to 2 400 companies.
– Survey by CERES undertaken for institutional
investors – 280 - in order to understand the risks and
opportunities of companies impacted by climate
change.
– Investors are now elaborating climate related ratios:
Low Revenues/Co2 would indicate high climate.
– See www.cdproject.net: AXA, Aetna, Aegon, Allstate,
Aviva.

30. Proposed Disclosures
– SEC:
• Being pressured to issue guidelines on disclosure
covering carbon disclosures and potential impact
of climate changes on companies: scenarios.
• Item 101 of Regulation S-K on the discharge of
materials into the environment
• Item 303 of Regulation S-k on disclosure around
future trends likely to affect profitability.
• 96% of electric utilities provide disclosure on
climate risk while only 15% of property-casualty
insurers do so.

31. Final thoughts
• According to AXA in its 2005 SEC filing:
"20% of the World GDP is affected by climate
change while for insurance companies, climate
change is more important than interest or FX
risks. “
“ The insurance industry will face new challenges
in the coming years in increases in future claims,
which will become harder to assess based on
past events. "

32. Thanks
To Ellen Bull, librarian at the Society of
Actuaries for her continued support and
help in preparing this presentation.

33. Contact
Michel Rochette, MBA, FSA
• Enterprise Risk Advisory
• 954-607-6969
• Michel.rochette@enterprise-risk-
advisory.com