COVID-19 risks kicking the climate can down the road

Published on Wed, 08/07/2020 - 15:34

As The Economist put it, "following the pandemic is like watching the climate crisis with your finger jammed on the fast-forward button". The pandemic and the climate crisis have a number of similarities. They are no respecter of borders. They are low frequency/high impact catastrophic risks that do not tend to feature highly on the risk registers of most businesses.

By Hoe-Yeong Loke, Research Manager, Airmic.

The 2020 United Nations Climate Change Conference slated to be held in November in Glasgow, also known as COP26, which would have provided the vital forum for governments to co-ordinate their climate action plans, has been postponed.

There is a real danger of kicking the can down the road. Climate change is already posing risks to businesses today. Flooding and other extreme weather events have damaged assets and have disrupted business operations. These will cause knock-on effects that will disrupt supply chains, impact staff, ultimately leading to lost revenues and reputational damage.

Yet, many businesses still see climate change as something for governments and NGOs to deal with and coordinate and are unwilling to take appropriate action unless forced to do so by legislation.

That said, the number of companies committing to net-zero emissions by 2050 is increasing.

Climate-driven politics

Climate issues are also shaping politics and ideology for a new generation. All this could transform the consumer sentiments of members of the next generation.

Climate-driven politics is also one of the major forces behind the rise of 'millennial socialism'. The Green New Deal in the US calls for unprecedented levels of government borrowing to fund universal health care, a universal basic income, a jobs guarantee, as well as insisting on decarbonisation within a decade.

This in turn has implications for the future of climate policy, to which businesses ought to sit up and take notice. Instead of leaving it to the market, through carbon taxes or carbon trading, such politics and ideology have a marked preference for central planning and regulation as the solution to climate change.

Climate change: The transition risks

If governments fail to mitigate climate risks with sufficient lead time, it will have the effect of increasing the transition risks. Businesses would be forced to adjust more rapidly to achieve carbon budget goals when the climate situation gets more dire.

Employees would have to retrain for new jobs more rapidly as old ones are displaced. When the price of carbon changes drastically within a short period of time, this will have knock-on effects on electricity tariffs for example, which bring political consequences.

Nevertheless, there has been significant policy work, such as the European Green deal, a set of policy proposals from the European Commission to make Europe climate neutral by 2050, as well as developments in the financial services sector such as the Task Force on Climate-related Financial Disclosures (TCFD) initiative, which seeks to develop voluntary, climate-related financial risk disclosures for use by companies in providing information to investors and other stakeholders.

The full Airmic survey report, Top risks and megatrends 2020, can be downloaded here