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How Academic Research Can Help Drive Climate Risk Resilience
By leveraging the advances made by academic research, companies can develop more robust climate risk resilience.
Climate and catastrophe research from academic institutions provides deep insights into risk and the impact of potential losses.
Identifying current needs and potential areas of uncertainty is critical when building a climate risk plan.
Long-term climate risk strategies should incorporate what the company can do to control future loss outcomes.
OverviewGiven the rapid and volatile increase in weather hazards in recent years, businesses are realizing that an effective climate risk plan is more important than ever.
To create the most effective strategies for climate risk and sustainability, it’s essential that organizations have the most useful and up-to-date data. One way to gain greater insights and a deeper understanding of climate risk is through working with academic institutions at the forefront of climate research and catastrophe modeling.
Liz Henderson, head of Catastrophe Analytics at Aon’s Reinsurance Solutions, shares her thoughts on these research partnerships.
What can organizations gain from collaborating with academic institutions when it comes to understanding climate risk and building resilience?Liz Henderson: There’s a long history of using academic research and climate modeling in the insurance industry. Something that’s critical to a larger number of organizations — such as financial institutions, public-sector entities, large corporations and private-equity firms — is that they now have a massive need for the same type of insight that people have been using in insurance for 30-plus years.
What’s challenging now is that the current methods for understanding the impact of climate change on frequency and severity of events aren’t really adequate. When you’re an organization that has assets that are at risk, the intersection of hazard, exposure and vulnerability is what really matters. Risk is not the same thing as just hazard on its own. To understand risk and risk resilience is to understand the impact of loss on your organization. Partnering with the researchers studying climate change and helping them understand the importance of risk from a business perspective can really help focus their research.
To create the most effective strategies for climate risk and sustainability, it’s essential that organizations have the most useful and up-to-date data
How does the research impact the way clients think about climate risk?Liz Henderson: Climate science is a wide-reaching, dynamic field. There’s a fragmented landscape of data from government sources and from academia, and private vendors are trying to use this data to make informed decisions. When you are a user of this type of information — especially a newer user — it is extremely difficult to feel confident that you’re getting information that is relevant to your organization and represents the current state of scientific thinking.
The theory behind working with academics is that they can help to support this need. It’s important for leaders to understand that when they’re doing forecasting in this active area of research, there isn’t really one right answer. Pulling academic insights into your decision-making framework allows you to be able to put your hand to your heart and say, “This view of risk uses the best science that’s out there.”
How should leaders be thinking about academic research as they’re strategizing around climate risk and resilience?Liz Henderson: The first thing to do would be to think holistically. When you think about climate and all the different components of risk involved, it’s easy to get overwhelmed. There’s physical risk, which includes chronic and acute perils and transition risk. There are things like sustainability, sustainable investments, carbon footprints and the reporting that’s required around all of that. Having a clear picture of your current circumstances and identifying some focus areas is necessary to make any kind of trajectory forward.
I think every person can relate to the feeling of, “I was told it was going to be sunny, and now it’s raining, and I didn’t bring my umbrella.” That uncertainty exists in climate modeling, catastrophe modeling and any kind of physical trajectory. As leaders are building out their program to address risks, they really need to be skeptical of any single answer that they’re looking at. Understand that while every individual view can be wrong, they can still be useful.
Leaders also have underlying risks related to the data that they are feeding into these models. The models are predicting loss based on your portfolio. Is the data that they’re feeding in reliable? That’s a source of uncertainty. Adjustments have to be made to account for it, and those adjustments can come from academic research.
With all of that uncertainty you have to ask yourself questions. What’s my program? What is my remit? What is realistic for me to achieve today? How do I put a structure into place so that as science changes, my data gets better and the models update, we can quickly adapt and communicate that change to the appropriate people? A lot of leaders rush to start evaluating climate change vendors. But it’s important to start with what the climate risk program actually needs to look like to account for uncertainty.
Pulling academic insights into your decision-making framework allows you to be able to put your hand to your heart and say, ‘This view of risk uses the best science that’s out there.
How should companies balance short- and long-term climate risk resilience goals as circumstances change in real time?Liz Henderson: There’s short-term tension that will always need to be addressed when your goals and incentives are to return profit to your shareholders. Fundamentally, businesses need to be able to be profitable and sustainable in a changing climate.
For long-term strategies, companies should look at ways they can control loss outcomes. Hazards like wildfire provide an example of this: we know that the key underlying drivers that cause large wildfires are things that get worse under different climate change scenarios. But wildfires are also a peril that can be impacted by man, and we can make changes here to actually reduce loss.
Staying focused on what kind of better loss outcomes we can have helps you to not throw up your hands and quit. When you stay focused on loss, you can find the ways that you can be resilient.
There’s also investment going into community-level and building-level resilience. Businesses, too, can focus on the investments they can make to reduce the loss outcome. We know when we look at long-term strategies that we’re not going to see the benefits in the near term, but leaders are recognizing that they have to make these investments today in order to have a sustainable marketplace.
The new season of On Aon Insights premieres October 17, and features experts discussing hot topics in ESG and Climate. Follow the On Aon podcast for more!
The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
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