How CEO creativity can combat climate physical risks

Programming note: There was no post on Friday, due to Louie being incapacitated (meaning exhausted and hungover from the UK General Election). He promises to make it up to you with a double-feature in the coming weeks.

In addition, last week’s article “Should bank stress testers worry about the RCP 8.5 controversy?” contained certain copy edit issues which have now been corrected. We recommend you read the clean version today!

A key aspect of physical climate risk assessment, insurance, and climate adaptation revolves on the location of  immovable assets.  As global warming progresses, the chances of  flood- and wind-related damages will rise, possibly leading to elevated financial risk for businesses and their funders.  Climate adaptation involves taking steps to avoid or mitigate this elevated risk.

Put yourself in the shoes of the CEO of a medium-sized widget company.  The company has five production facilities and a swanky head office in the capital city.  At this level, I suspect that you and your management team would have a pretty good grip on many aspects of the physical risks facing your plants.  You may not be an expert in climate science, but you would have access to the engineers reports commissioned when you first invested in each property, and you would know what’s going on with the insurance premiums and rents, implied or actual.  You would get management reports related to all production outages.  You would track the costs associated with each location very closely – your bonus depends on it, after all.

A third party lender or outside investor, or course, does not have access to much of this insider knowledge.  Analysts at data startups, ratings agencies, and academic institutions must try to piece the information together, either by scouring public sources or by engaging in costly primary data collection exercises.  Companies like our hypothetical widget maker are the hardest to track, primarily because they are often privately held and thus not obliged to make public disclosures.