The Weather Corner: Institutions are taking note of the material risks of climate change and…
Tags: Climate Change, Climate Policy, Risk, Business Leadership, Extreme Weather

The Weather Corner: Institutions are taking note of the material risks of climate change and extreme weather. Are we at an inflection point? ClimateAi Feb 22·4 min read

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Source: United Nations IPCC

Independent of President Biden, in the last year, the world and its institutions have showed further signs of officially taking note of and planning around the material risks associated with climate change.

Severe weather events disrupt supply chains. In sectors like agriculture, for example, an unusual heat wave during flowering can cut down yields, while frequent storms can prevent farmers from getting out in the field + it might affect the distribution of the product. A research paper from 2017 showed that abnormal weather caused disruptions in the operating and financial performance of 70% of businesses worldwide. And those disruptions add up — estimates placed the cost of weather variability at about $630 billion for the U.S. alone. That’s 3.5% of the total U.S. GDP at the time.

Yet severe extreme weather events are likely to become more intense or more frequent from human-caused climate change. In the US, wildfires have already become five times more frequent in California; the Midwest experiences once-in-100-year floods every five years.

Policymakers are taking notice, and many nations have begun to put in place new climate-related regulations that mandate that publicly traded companies disclose their climate risks. France, New Zealand, and the United Kingdom are chief among them.

These regulations have far-reaching impacts across the economy — on asset managers, lenders, insurers, retirement funds, and publicly traded firms. In addition, analysts say that stricter and more comprehensive legislation on climate risk assessment and disclosure is expected, especially in the U.S., European Union, and Japan.

Some of these regulations on the horizon include:

The U.S.

The U.S. Federal Reserve (the U.S.’ central banking system): Outgoing chair Jerome Powell further stated in November that “climate risk is a material risk” and noted a likely expansion of the Board’s oversight duties to include climate risks. Incoming new chair Janet Yellen called climate change an “existential threat” and will likely implement new financial regulatory policy on climate risks.

The U.S. Commodity Futures Trading Commission (a government agency that regulates the U.S. derivatives markets): released a report in September that included 53 climate-related recommendations. The top three were a price on carbon; a mandate for disclosure of material climate-related risks in financial filings, including a universal definition of materiality for medium- and long-term risks (both qualitative and quantitative); and for regulators and financial institutions to “pilot climate risk stress testing” for sectors (particularly for agriculture, community and regional banks).

released a report in September that included 53 climate-related recommendations. The top three were a price on carbon; a mandate for disclosure of material climate-related risks in financial filings, including a universal definition of materiality for medium- and long-term risks (both qualitative and quantitative); and for regulators and financial institutions to “pilot climate risk stress testing” for sectors (particularly for agriculture, community and regional banks). The U.S. Securities and Exchange Commission (independent oversight agency that regulates the securities markets and protects investors): Commissioner Lee said in November that, “there is certainly evidence that climate risks are currently underpriced, particularly with respect to long-dated assets, utilities, commercial mortgage-backed securities, and potentially municipal bonds, among others.”

Commissioner Lee said in November that, “there is certainly evidence that climate risks are currently underpriced, particularly with respect to long-dated assets, utilities, commercial mortgage-backed securities, and potentially municipal bonds, among others.” The State of New York’s Department of Financial Services: announced in October 2020 that they expect climate risk disclosure from all regulated entities and non-regulated depositories starting in 2021, which includes all of the major banks on Wall Street.

Internationally

France: passed a law in 2019 that mandates that publicly-traded firms and asset managers report transition and physical climate risks.

The United Kingdom: signed into law in 2020 a mandate for TCFD-aligned disclosures across the economy by 2025, with a significant portion of mandatory requirements in place by 2023

New Zealand: will require all banks, asset managers, and insurance companies with more than NZ$1 billion in assets to disclose their climate risks by 2023.

In addition, regulators from Japan, Hong Kong, and the EU are also looking at laws on how companies should monitor, disclose, and address climate risks.

Have any more questions about global weather events, their impact, and how they’re linked to climate change? Send them to media@climate.ai — we will choose one to answer in the next newsletter.