The business of understanding (and solving) Climate risk
The Intergovernmental Panel on Climate Change (IPCC) released its 6th report, which stated the unequivocal role of humans in warming the ocean, atmosphere, and land (here is a good summary). The report went on to state that, “Many changes in the climate system become larger in direct relation to increasing global warming. They include increases in the frequency and intensity of hot extremes, marine heatwaves, and heavy precipitation, agricultural and ecological droughts in some regions”. In other words, the risk from climate change is only going to increase. As a result, businesses, people, and governments globally will need to understand the risk from these changes. And better yet, either preemptively have solutions or adaptation plans in place.
The cost of not doing so is monumental. One doesn’t have to look too far, sadly, for the loss of human lives (link, link). Or the negative impact on large corporations. Of several, one is Swiss Re announcing the insured loss of $42B a result of climate change. And that’s only in the first 6 months of 2021(!). Worldwide, it’s estimated that natural disasters, like wildfires, floods, and hurricanes have resulted in $2.2T in economic loss over the past decade. Understanding these risks present several, attractive business opportunities. Let’s double click on a couple of sectors.
The first is property insurance, which affects not just owners, tenants, but also corporations with global supply chains. In the latter case, there is also a potential material impact for the companies that have set net-zero targets across Scope 1, 2, and 3 emissions. In California only, over the past 5 years, it’s estimated that the wildfires have caused $57 billion in economic loss. So a global clothing retailer, hypothetically, with manufacturing in Bangladesh, could be exposed to not only the risk to the factory in the event of a natural catastrophe, but also to the accessibility of raw materials like cotton. Use of data driven insights, including aerial imagery, AI, and sensors to assess the impact of climate change will, as a result, become more important. One of the examples is using these data driven insights to understand the potential wildfire risk for insuring personal properties. I know this first hand living in the San Francisco bay area where our home insurance cost has increased 20% y/y (and we’re not even in the high wildfire risk area!). In the extreme case, I’ve friends who have been denied insurance all together because of the high wildfire risk. Moody’s $2B acquisition of RMS, one of the leaders in climate risk modeling and assessment, is yet another example.
Now to food and ag, an industry which is burdened by excessive waste and increased frequency of safety recalls. Almost 40% of all the food that’s produced is wasted (link, link); and if global food waste were a country, it would rank behind China and the US as the third largest emitter of greenhouse gases. Food waste that’s sent to landfill produces methane, a gas which is 80x more potent than carbon dioxide, is called out specifically in the IPCC report a reduction of which is “the single fastest, most effective way there is to slow the rate of warming right now”. The solutions like using natural silk protein to slow down the key mechanisms of food wastage address the problem of food wastage, and at the same time providing fresh and high quality food to end consumers. The increased occurrences of foodborne illness, likely due to many factors, is also attributed to the presence of cattle in the proximity to growing fields. With increased competition for arable land, how will this trend evolve in the future? In addition to safe farming practices, there likely will be increased need for traceability of food from the land to the table.
These are two of the examples in the broad theme of ESG investing, where investor groups like Climate Action 100+ (which BlackRock joined recently) with $52T in assets are working to coordinate the efforts to address climate change. This capital allocation will require standard reporting and transparency, which looks like it is in the works at SEC.
I’ve often said in these pages that climate change is the issue (and opportunity) for our generation. Understanding the underlying risks, and more importantly, deploying scalable solutions is an attractive business creation opportunity. And that’s what our planet, customers, and the next generations ask of us.
(Note: The opinions in this article are mine only and not of any of the companies / organizations that are mentioned.)