Companies and governments worldwide are changing their behaviors and examining their risks in the face of climate change, a managing director for Standard & Poor’s said as he held up the insurance industry as a good example of how to adapt to a world with greater natural risks.
Steve Dreyer, managing director of Standard & Poor’s U.S. utilities and infrastructure ratings, and Dan Utech, special assistant to President Barack Obama on energy and climate change, during a conference call on Monday talked about how insurance companies and investors are including climate change and severe weather in their risk assessments and decision-making processes.
This discussion was hosted by Business Forward, a nonprofit group that works with businesses and government, and it happened just two weeks after the Environmental Protection Agency released new carbon standards for existing power plants.
There has been some backlash against the new regulations, which call for existing U.S. power plants to reduce their greenhouse gas emissions at least 30 percent below 2005 levels by 2030. A report by the U.S. Chamber of Commerce shows that as a result of the regulations the economy will take an $859 billion hit by 2030 and Americans will pay more for electricity, see slower economic growth and experience fewer jobs created.
Utech said the new regulations, expected to be finalized next June, are tailored for each state, putting each in charge of how it reduces its own emissions.
“States are really in the driver’s seat,” he said.
He noted that by June 2016 states will be required to submit initial plans to comply with the new standards and that states participating in multistate efforts have until 2018. States can meet these reduction standards by a combination of measures, he said.
Despite the fears over regulation, S&P has noticed more companies looking at their exposures, which is something the rating agency is unlikely to miss because examining risk is part of what it does, Dreyer said.
“We always are looking at the potential impact of these kinds of things on the ability of companies and governments to repay their debt obligations,” he said.
Among the thousands of companies and governments S&P rates, many are beginning to look at ways to mitigate risks and protect their bottom lines, according to Dreyer.
And a good template for such practices may already exist.
When Hurricane Andrew struck the Southeast U.S. in 1992, it sent nearly a dozen carriers under. However, a decade later when Katrina struck and decimated New Orleans and surrounding areas, no insurers declared insolvency, Dreyer noted.
The industry has learned to better model for catastrophe, and following Andrew carriers structured their risks so as not to be taken down by any one large catastrophe, he said.
“The insurance industry demonstrated that the effects of extreme weather can be managed,” he added.
Other sectors are catching on. Several industrial companies, for example, are turning to bond investors to finance ways to mitigate risk, including the green bond market, which is taking off in Europe, according to Dreyer.
“We see that market being very attractive to investors,” he said.
The green bond market, which is now worth roughly $10 billion annually, is expected to continue to see fast growth as pensioners, sovereign wealth funds and other investors view these bonds as a diversification play from their typical investments, as well as a way to make a certain percentage of their portfolio green, Dreyer said.
“Our projection is that this year it will double to $20 billion,” he added.
In a follow-up interview with Insurance Journal, Dreyer said the takeaway from his talk isn’t that S&P is looking at portfolios in different ways due to climate change to conduct ratings, but that the companies themselves are acting differently in the face of threats like more frequent severe storms, rising sea levels and drought.
“I wouldn’t say that we are doing anything radically different,” Dreyer said. “I think what we are saying is the behaviors are changing among the companies that we rate. They’re looking at risk in a different way.”
He said that a growing cadre of companies are taking the following steps:
- Evaluating just how worst case scenarios may play out.
- Forming contingency plans.
- Looking at regulations and how to adapt to future regulations.
- Examining ways natural catastrophe exposures are affecting the bottom-line.
“We see this environmental topic coming up more frequently in a number of different ways,” he added.