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Cambridge Institute for Sustainability Leadership (CISL)


22 February 2019 – New open-source models from ClimateWise, a global insurance network, offer step-by-step guides to help the financial industry prepare for risks posed by climate change.

Investors and lenders including mortgage portfolio holders need more support to identify, measure, mitigate as well as adapt and report the impact of climate change, according to a global network of insurers.

Climate risks to physical infrastructure combined with other threats mean that losses from climate-related hazards will continue to rise unless investors, lenders, insurers and policymakers undertake significant risk management efforts, said a new report from ClimateWise, an industry group supported and convened by the University of Cambridge Institute for Sustainability Leadership (CISL).

Under the most extreme projections with 4°C of warming, for example, average annual losses caused by floods to UK mortgages could more than double, putting pressure on insurers and exposing mortgage lenders.

Property-level adaptation can play a key role in reducing this increase in risk, off-setting up to 65 per cent of the increase in losses, the report’s illustrative results showed.

In Physical risk framework: Managing the physical risks of climate change, the ClimateWise Advisory Council offers a practical guide for investors and lenders based on natural catastrophe models to help them understand changing physical risks and the impacts on their portfolios.

David Rochester of Lloyds Banking Group said: 

“The key observation of this report is – that we need to focus on both the mitigation of climate change, as well as adaptation to its effects, and that if we do both, we can maintain affordable insurance - is an important message and one that Lloyds Banking Group very much supports. This open-source tool will provide investors with the means of accessing the information they need to take action to mitigate climate risks and protect their assets.”

The report highlighted that not all investors and lenders will be equally exposed, with significant differences in exposure between portfolios as well as within portfolios. While insurance will play an important role in managing the impact of climate change, the increase in risk could, in the most severe cases, make premiums unaffordable.

Even today, the majority of natural disaster losses are not covered by insurance. Swiss Re estimates that the total economic losses from natural disasters have averaged US$180 billion annually in the last decade. Of this, around 70 per cent of risks from natural disasters remain uninsured, rising to 80–100 per cent in emerging markets.

Dr Bronwyn Claire, Senior Programme Manager, CISL, commented:

“The project highlights how the measures necessary to mitigate and adapt to climate change should be factored in as potential transition risks, which could increase significantly by 2030.”

In a second report entitled Transition risk framework: Building capacity to manage the impacts of the low carbon transition on infrastructure investments, the ClimateWise Advisory Council explore how to quantify policy changes, reputational impacts, and shifts in market preferences, norms and technology as areas of possible risk and opportunity for investors.

The framework, which is aligned with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD), guides investors through assessing their asset types exposed to transition risk and opportunity, defining the potential impacts and incorporating transition impacts into their financial models.

Geoff Summerhayes, Chair of the UNEP Sustainable Insurance Forum, said:

"The framework responded to a critical paradigm shift in the way financial supervisors and regulators consider climate change as a core prudential risk.”

Dominic Christian, Chair of ClimateWise and Global Chairman, Reinsurance Solutions at Aon, added:

“US$94 trillion will be required globally, by 2040, to meet the world’s growing infrastructure needs. Yet it is crucial that this infrastructure both supports our transition to a low carbon future and is financially resilient to the inevitable social, economic and technological impacts this transition will bring. Exposure to infrastructure investments stretches across the financial services sector. Yet few asset owners are truly considering transition risk. These two reports will go some way to help address this.”

These two reports highlight the value of enabling financial institutions to embed environmental scenario analysis into routine decision-making. Doing so would ensure that capital is appropriately allocated in support of financial stability and sustainable economic development as well as the conservation and rational use of natural capital and renewable energy resources

Read more and download the report: Physical risk framework: Understanding the impact of climate change on real estate lending and investment portfolios. 

Read more and download the report: Transition risk framework: Managing the impacts of the low carbon transition on infrastructure investments.

Learn more about ClimateWise and the ClimateWise Principles.

Read the speech given at the launch of the report by Geoff Summerhayes, Chair Sustainable Insurance Forum: Financial exposure: the role of disclosure in addressing the climate data deficit.