A History of Climate Climate and Corporate Risk
In 2010 the Securities and Exchange Commission passed a rule requiring publically traded companies to report their corporate risks from climate change. This was the first public effort to make the connection. It did not specifically identify real estate risk. Of course, Real Estate Investment Trust stocks are publically traded. To my understanding, this requirement has not been enforced by the Agency.
According to my research, the first connection between climate change risk and real estate values “Climate Adaptation Finance and Investment in California”, by Jesse M. Keenan, a faculty member at Harvard Graduate School of Design, was published in 2018.
The Urban Land Institute and Heitman, a real estate investment advisory firm jointly published a paper “Climate Risk and Real Estate Investment Decision Making” in February 2019. Within six months, the real estate internet world was alive with articles and governmental agencies at every level were making plans for addressing the risk . Now, only eight months later, bank and insurance companies and the agencies that oversee them are talking about future risks. A stock market “index tracking” company has bought a climate change consulting company.
These include banks, insurance companies, government agenies, obviously investors and owners and the providers who do the analytics. The blog will be in two parts.
In in October 2019, Kristalina Georgieva’s, the new head of the Intenational Monetary Fund, the bank that lends to countries, in her inaugural speech, as reported in the Finacial Times, headlined a discussion not about gobal economin growth, but “Can Central Banks Fight Climate Change?” where she not only called on central bankers to act, but announced that the IMF “is gearing up very rapidly to integrate climate risks into our surveillance work”. Information can be found here. When the IMF focuses on Climate Change, you know it’is a big deal.
In fact, according to the Times article by Gillian Tett, 47 central banks have joined The Newtwork for Greening the Financial System (Membership) started by Makr Carney, governor of the Bank of England. The stated purpose from their website is
“”to help strengthening the global response required to meet the goals of the Paris agreement and to enhance the role of the financial system to manage risks and to mobilize capital for green and low-carbon investments in the broader context of environmentally sustainable development. To this end, the Network defines and promotes best practices to be implemented within and outside of the Membership of the NGFS and conducts or commissions analytical work on green finance”.
The European Central Bank, the central bank for the European Union, is considering including climate change riska as part of future entity (country or company) bank stress tests. According to an article by Reuters, a methodology for calculating risks related to climate change is not yet fully developed so it is unlikely to be included in next year’s European Banking Authority stress test, but it could be used in 2022.
According to the Axios website, even though President Donald Trump is pulling out of the Paris Accord and announced that Climate Change will not be on the G7 June meeting agenda, the Federal Bank chairman Jay Powell announced in an October 2019 speech that climate change ia “an absolute first-order issue” but said it was not clear to him if it’s “a first order of business for central banks.”
In a September 2019 Bloomberg Businessweek article on climate change risk in the banking industry, their bottom line is “Climate change is a major economic risk, but it’s not yet clear how to account for it. Banks are just starting to find ways to identify the vulnerabilities in their own businesses.”
Also in a September 2019 article, Reuters says that 130 banks worth $ 47 Trillion have adopted new UN-backed climate change principles. They include Deutsche Bank, Citigroup and Barclays “These principles require banks to consider the impact of their loans on society – not just on their portfolio,” Simone Dettling, banking team lead for the Geneva-based United Nations Environment Finance Initiative, told Reuters
Additionally, but probably not finally, according to Axios, on January 20, 2020, The Bank for International Settlements — the central bank for central banks — warned in a research paper that climate change could cause “potentially extremely financially disruptive events that could be behind the next systemic financial crisis.”
I was surprised to find that the National Association of Insurance Commisioiners adopted the “Climate Risk Disclosure Survey” in 2010. According to thei website, ihe survey consists of eight questions about, for example, whether an insurer” has climate change policies concerning risk management and investment management; what current or anticipated risk climate change poses to an insurer; and what steps an insurer has taken to engage key constituencies regarding climate change.” A number of states run as a mandatory process in coordination with the California Department of Insurance.
Reinsurance companies are where insurance companies go to buy insurance. The five largest in the world are Munich Reinsurance Company, Swiss Re Ltd., Lloyds (of London), Hannover Ruck, SE (stands for Societas Europeae, a company in the European Union) and Berkshire Hathawy Inc. (yes, Warren Buffet).
Munich Reinsurance Company wrote $35 billion of premiums in 2018. Their climate change risk program is very extensive, including agricultural risk coverage. Their website, headlined “Not If But How” on climate change is also very thorough, going through the basic science.
The website Insurance Journal reported in 2016 that Warren Buttet balks at reporting the climate change risk figure for his company. He will oppose a Nebraska advocacy group that will propose at the next stockholders meeting. The fact that he doesn’t want to disclose anything doesn’t mean he is a denior
Actuaries are the people who calculate risks in the insurance industry. The American Acadamy of Actuaries periodically issues an actuary climate index. (Note: The Chrome Browser lists this website as unsecrured, which typically means that it’s not written in the htttps format. However Malwaybytes will post a warning, but neither it nor Adblocker has blocked it,)
MetLife Investment Management, the internal investment group of the county’s largest life insurance company, has the following statement on their website “Matters pertaining to environmental issues are identified and discussed to determine the issuers’ impact on the environment (air, water, land protection, climate change and resource use) and the risk that such issues present to the credit profile or business operations.. MIM believes an active engagement with company leadership is a key to managing investment risk. Investment analysts frequently interact and engage in discussions with a firm’s senior management throughout the initial due diligence process and as part of the portfolio monitoring process. Ongoing dialogue helps to raise awareness of sustainable business practices.
A discussion of the other stakeholders and recently published facts about climate chage will be in Part 2,