A R/evolution in Climate Risk? From Understanding to Action

Taking the temperature

‘R/evolution of Risk’ is the theme of Aon’s 16th Hazards Conference in September. There is no doubt we have seen many revolutions in risk since the first conference in 1987: from the evolution of catastrophe models to cyber risk, the change is tremendous. However, perhaps no risk is as complex, systemic, and fast changing as the risk from climate change.

Barely on anyone’s lips four years ago, ‘climate-related financial risk’ has become a buzzword in financial services. The release of the G20’s Taskforce on Climate Related Financial Disclosures (TCFD) recommendations two years ago changed everything. Centred around disclosing financial impacts from different climate scenarios, TCFD has become a buzzword in finance circles. Over 800 businesses and organisations (and counting) have signed up as TCFD supporters, including Aon. How much action is there on the ground, however?

Learning as we go

Scenario analysis isn’t new. Shell pioneered use of scenarios in business planning in the 1960s. The Lloyd’s insurance market uses ‘realistic disaster scenarios’ to help stress test systemic risks. Widescale adoption of scenario analysis, however, is new. Drawing upon science, translated through data and analytics, and econometric analysis, quantifying and assessing climate risk is hard.

To execute a proper TCFD disclosure you need the right governance structure and assessment of materiality. Where does this belong in the organisation? Risk? Finance? Sustainability? The answer depends on the corporate culture, but most TCFD disclosure done to date have looked more like extensions of Sustainability reports than financial material information investors can use.

Fast enough?

In addition to being challenging, there is the question of scale and impact. The rebranding of climate change as a climate ‘crisis’ or ‘emergency’ in some media and political circles is shifting the public debate around the urgency of the climate challenge. There is the expectation that assessment of climate risk, let alone disclosure, isn’t happening fast enough and that capital flows aren’t fundamentally being changed.

While climate finance has certainly gone from the millions to the billions, experts from the Climate Policy Initiative, who map climate finance flows, note we need trillions to mitigate and adapt to climate change. Is the answer greater intervention from regulators? Or perhaps greater momentum from asset owners? Many would argue it’s some combination of the two.

From risk to opportunity

At this year’s Hazards Conference, we will explore these themes with regulators, insurers, and banks. Yet while a stock-take of where we are and where we need to be is important, let’s also move the conversation from risk to opportunity. There is tremendous opportunity from a better understanding of risk. Markets see upsides from managing and understanding downsides.

The insurance industry is full of expertise to help unlock these opportunities, from our leading-edge data and analytics on natural catastrophes, to risk engineering and actuarial analysis, to innovative solutions like parametrics and alternative risk capital. By delaying we are effectively doing nothing. Let’s work together to accelerate capabilities to measure, manage, and reduce climate risks. The risk is enormous, but the opportunities even bigger.

Read more about the Hazards Conference

Greg Lowe, Aon plc
Global Head of Resilience and Sustainability
09.45am - 10.45am
Wednesday, 25 September