2024 IRM SIG Climate Change Risk Trends & Predictions

In 2023 the IRM CC SIG focused on coordinating seminars for the SIG members in which we focused our efforts on collaborating with other IRM SIGS and RIGS groups.  This covered some of the most important climate related trends for organisations in respect to how to build improved climate resilience as well as improved governance and reporting.

In December 2022, Martin Massey the SIG Chairman published “Climate Change Enterprise Risk Management: A Practical Guide to Reaching Net Zero Goals” a book endorsed by the IRM. A Chapter on climate change was also written for the 2nd Edition of the Risk Management Handbook published in 2023.

Organizations in general have taken positive steps to meet regulatory and business requirements and embed climate change into their enterprise risk management frameworks and business processes.

However, SIG committee members believe that focus areas for risk managers should be in respect to improvement in scenario analysis capabilities and embedding climate into existing risk appetite statements and reporting dashboards. The WEF Global risk reports provide a good back drop to global climate change risk trends 2024.

World Economic Forum (WEF) Global Risks Report 2024

In the recently published report, environmental risks continue to dominate the risk landscape with extreme weather as the top environmental risk. In respect extreme weather, the report states that new records will continue to be broken in respect to temperature rises leading to extreme heatwaves, drought, wildfires and flooding.

Climate change concerns are primarily covered in the report in respect to  “climate tipping points” within the next decade including reaching the 1.5C net zero target. It states that “ many economies will remain largely unprepared for “non-linear” impacts: the potential triggering of a nexus of several related socio-environmental risks has the potential to speed up climate change, through the release of carbon emissions, and amplify related impacts, threatening climate-vulnerable populations. “

Another important related issue is they state that most climate models, whether public, private or academic, will not be able to adequately capture these nonlinear impacts.

IRM SIG – Climate Risk Predictions

The IRM SIG committee have set out five main macro risk themes, and that risk managers should focus on in terms of risk trends and predictions in 2024 in the context of managing and mitigating their risks in their business.

Some of the major climate risk trends that were included in the seminars that we conducted in 2023 which we expand on in this year’s risk trends report:

 Extreme Heat and Heatwaves

 Shift to more nature-based financial disclosures

 Accelerated regulatory enforcement to combat “greenwashing”

 Increase drive for sustainable financing solutions

 Lack of climate related insurance coverage and alternative solutions

Extreme Heat and Heatwaves

Extreme Heat and Heatwaves

2023 was the warmest calendar year in global temperature data records going back to 1850. The latest data suggests that we may reach the 1.5C threshold above pre-industrial levels, the ambitious limit set by the Paris Agreement, by 2029.

One of the main natural hazards is heatwaves and climate change is increasing the likelihood of these types of events occurring which is in turn is leading to greater impacts. Heatwaves pose a threat to people, ecosystems, and the economy. Extreme heatwaves in 2023 included in China, US/Mexico region and Southern Europe which scientists state that the heatwaves that occurred in July 2023 would have been virtually impossible to occur if humans had not warmed the planet by burning fossil fuels.

Organisations need to therefore carefully consider the impacts of heatwaves and the knock-on effects of these extreme heat events since heat can exacerbate drought, create wildfire conditions; heat-related illnesses and deaths; the urban heat island effects; crop failures, strain in infrastructure, such as transportation and energy, that can also lead to other extreme such as blackouts.

As Head of Climate Resilience for Skyline Partners please see details of an innovative solution developed to provide financial support to mitigate the impact of heat stress for the Agricultural sector.

Case Study

Unique Insurance Cover to provide protection against heat stress in the agricultural sector, specifically for livestock. Problem: Due to climate change, there is an increase in heat stress events, that is driving adverse economic losses to the agriculture industry, specifically for livestock.

Solution: Skyline was appointed to embed a parametric insurance with IoT sensor and software as a marketing differentiator and provide a protection buffer for these intangible losses at times of need. Portfolio of 75,000 dairy cows are covered in France.

Benefits: 75% of the total limit was paid out in claims, following the exceptional heat waves in 2022 in France (and across Europe).

Shift to Nature-Related Financial Disclosures

The Taskforce on Nature-related Financial Disclosures (TNFD) is one of many globally backed initiatives that provides holistic practical recommendations to enable the first steps of standardising this currently complex complicated challenge. TNFD provides guidance on the identification and assessment of nature-related Issues.

They suggest using an integrated assessment approach called LEAP approach which stands for (Locate, Evaluate, Assess and Prepare).

Understanding nature refers to the natural world, emphasising the diversity of living organisms, including people, and their interactions with each other and their environment. It is made up of four realms: land, ocean, freshwater and atmosphere.

Whilst broad, the TNFD’s most recent suite of 14 key recommendations lean towards helping organisation’s cut through the complexity of metrics and indicators available, permitting the use of carefully selected proxy data and analysis. Simplifying this process will help to inform required sustainable governance and short, medium and long term risk and opportunity strategy management through an annually comparable reporting format.

In respect to the assessment process, it is important to recognise new innovative approaches that are available such as use of satellite imagery that offer accessible insights for decision-makers in green finance and corporate reporting.

Accelerated regulatory enforcement to combat “greenwashing”

Greenwashing, or indeed the efforts by firms to present themselves in a favourable public light through association, is not a new concept and one that we discussed in last year’s report. However, it is the increasing regulatory enforcement that is the main global trend.

Whilst governments remain the main targets, the number of cases filed against corporates has increased, and the range of sectors targeted has become more diverse, moving to include food, agriculture, transport and finance as well as the core cases against oil and gas companies.

This reflects the increasing number of complaints and legal cases that have also been brought on climate change grounds. Specific examples include disinformation spread by high-emitting companies about the impacts of their products.

Increasing awareness means that initiatives by regulatory bodies of all forms are in turn leading to increasing identification of potential cases which may be supporting the increasing trend. For example, the International Consumer Protection Enforcement Network (“ICPEN”) hosts an annual sweep of websites, which gives consumer authorities across the world the opportunity to target fraudulent, deceptive or unfair conduct online.

Many global supervisors are picking up the pace to on help prevent greenwashing and are calling out firms not doing enough to manage climate risks. Some of this was seen in 2023, but with new precedents and stronger rules, organisations can expect greater enforcement in 2024.

Increase drive for sustainable financing solutions

Sustainable finance has experienced a significant surge and transformation over recent years and evolved as a mainstream theme in financial institutions and markets. This transformation has been driven by multiple factors notably the climate pledges signed by more than 140 countries for reaching net zero and the pressure on governments and companies to turn these pledges into concrete actions.

Investors are increasingly seeking to finance sustainable solutions. At the same time, sustainability frameworks and sustainability disclosures are becoming more robust as stakeholders intensify demands for greater transparency.

There has been a noticeable surge in investor demand for sustainable investment opportunities particularly from millennial investors with climate issues being a top priority for many of them.

It is important to note that investors have concerns over the availability, quality, and accessibility of reliable and actionable data, which often impedes their ability to make informed investment decisions to invest in truly sustainable companies and projects.

Lack of climate related insurance coverage and alternative solutions

The insurability and pricing of climate-related risks is becoming an increasingly critical concern for insurers and policymakers, and if no countermeasures are taken, the protection gap is expected to widen. This was a key issue discussed at Cop28.

The insurance industry has a unique role to play in addressing climate change by making society and the economy more climate resilient. However due mainly to the increased frequency and severity of natural disasters associated with climate change there is a continued global trend in price increases and unavailability of the coverage for certain types of risks, particularly property related perils such as flood, wildfire and drought.

The insurance industry is developing a range of innovative insurance solutions that seek to incentivise climate-related risk prevention, for example through offering lower premiums for implementing climate-related adaptation measures such as flood early warning systems.

The main growth area however is the design of new types of insurance solutions that are event driven solutions often termed parametric and/or index insurance solutions. With the rise of new datasets, satellites and IOT sensors, parametric or index-based insurance solutions are expanding fast and provide an alternative or in many cases the only option to insure risks that can provide organisations with improved resilience.

Some use cases for parametric/index based insurance in the context of climate-related perils include extreme weather events; non-physical property damage supply chain coverages as well as providing gaps for new climate related perils such as droughts and heat stress across a range of industry sectors.

Please contact me if you would like to discuss any aspects of this article further.

Email: martin.massey@oneriskconsulting.com

Book: Climate Change Enterprise Risk Management: A Practical Guide to Reaching Net Zero Goals

​LinkedIn: https://www.linkedin.com/in/martinmassey/