by Nik Bollons.
As world leaders meet this month to talk about the state of the global economy, climate change should be a key agenda item.
World leaders and top executives are currently meeting in the sleepy, snow covered Swiss ski resort of Davos to discuss key geopolitical issues – and how to address them. Likely topics include the predicted slow-down in the global economy, increasing geopolitical tensions, ongoing trade disputes and increasing nationalism (amongst others).
Other Agenda Items
But according to The World Economic Forum’s Global Risk Report 2019 released ahead of the meeting, leaders should also allocate time to discuss ‘environmental risks’. The report – authored by leading economists and academics – highlights that risks such as climate change are likely to have significant impact on long-term global development.
‘Extreme weather’ is highlighted (again) in the report as the top global risk in terms of probability and impact on global development, with the ‘failure of climate change mitigation and adaptation’ and ‘natural disasters’ in second and third place respectively.
The Importance of Climate Risks
We operate in an increasingly globalised, fast paced and changing world. Climate risks (such as sea level rise, changing patterns of extreme weather events as well as ‘transitional risks’ such as carbon taxes) are increasingly likely to add more disruption to already stretched supply chains, change the flow of capital away from ‘dirty fuels’ to renewable energy and alter consumer purchasing behaviour.
We can already see this happening.
For example, the Californian utility company PG&E has become one of the first ‘climate casualties’. PG&E is heading towards Chapter 11 bankruptcy in the US due mainly to the financial impact from the 2017 and 2018 wildfire season – or what it terms ‘climate-driven extreme weather’.
Direct Climate Risk in Singapore
What do climate change risks look like for Singapore?
According to the Singapore Government’s Climate Action Plan, physical impacts of climate change to Singapore include:
- increasing intensity and frequency of heavy rainfall events,
- an increase in daily temperature by 1.4C to around 4.6C; and,
- predicted rise in sea levels of 0.76m.
These risks may disrupt transport and infrastructure and reduce the durability and lifespan of buildings and assets (key sectors in the Singapore economy). Risk also provides opportunity for some companies and certain sectors– increasing temperature increases demand for air conditioning (and energy).
The Singaporean government is responding to many of these issues through strengthening key assets and infrastructure and disaster preparedness.
Indirect Climate Risk in Singapore
But there may be other indirect impacts of climate change to the Singapore economy.
Singapore imports 90% of all of its food from overseas. According to the International Rice Congress, climate change across the Asian region could increase rice prices by more than 30% by 2050. That’s roughly a 1% increase per year between now and 2050. This will impact domestic markets, and foreign rice trade.
Singapore has a significant tourism industry including package travel to destinations all-over South-East Asia. However, climate change is already impacting the tourism industry. For example, Maya Bay in Thailand – famously featured in “The Beach”, starring Leonardo DiCaprio – was closed in 2018 to recover from over use and effects of rising sea temperatures.
Some of these risks may or may not play out, and we don’t know exactly what their impacts will be.
Companies therefore need tools to understand the direct and indirect impact of possible climate risk to their business.
Employing scenario analysis and running ‘what if’ exercises based on recognised climate impact assessments can provide useful ways to identify key risks, and quantify their financial impacts.
This methodology can include simple qualitative based workshop-style exercises with key members of operations and risk, through to modelling of supply chain impacts all the way to complex financial impact analysis.
These approaches help identify climate risks with the greatest financial impact to the business. They also provide a strong foundation to build adaptation and response strategies.
Time to wake up
The majority are watching the meeting in Davos to see what direction will be set on pressing short-term global economic issues.
A smaller minority are looking to see what the meeting says about long-term environmental risks like climate change.
Failure to do so may result in a painful wake up call in the not too distance future.
Nick Bollons is Principal Consultant at Paia Consulting Ltd in Singapore.
Nick specialises in financial risk assessment of climate change.