Reinsurers are well-placed to advise clients on responding to climate change risk. As climate change and the associated increase in natural catastrophe events alters the contemporary risk landscape, there is now an opportunity for companies to partner with the (re)insurance market and put its expertise to work.
Climate change is complicating two of the most important board responsibilities — its duties to protect long-term shareholder value and oversee risk management, according to Rob Bailey, Director of Climate Resilience at Marsh & McLennan Advantage and Jack Flug, Managing Director, FINPRO at Guy Carpenter-affiliate Marsh U.S. Investors and regulators are paying more attention to how companies are managing climate risks as concerns grow about the risk that climate change poses to shareholder value, with implications for directors.
New Expectations for the Governance of Climate Risk
This trend of increasing expectations was exemplified by BlackRock CEO Larry Fink when earlier this year he argued that “climate change has become a defining factor in companies’ long-term prospects.” He stated that BlackRock, the world’s largest asset manager, would ask companies to disclose data on climate risks and opportunities and that it would “be increasingly disposed to vote against management and board directors” that fail to disclose and manage climate risks. These were not empty threats. Six months later, BlackRock had voted against 53 companies for unsatisfactory progress on climate-risk disclosure or management and put a further 191 companies “on watch.”
BlackRock is far from unique in this regard. In 2019, State Street Global Advisors published climate risk oversight guidance for directors in its portfolio companies, having engaged with 160 companies on climate issues in the previous three years; Legal & General Investment Management engaged with 249 companies on climate issues in 2019 alone — more than on compensation, diversity or strategy.
The climate-risk disclosures demanded by investors, most notably those recommended by the Task Force on Climate-Related Financial Disclosures (TCFD), are voluntary, but indications are that this is set to change over time in many jurisdictions. The U.K. government has proposed mandatory reporting in line with the TCFD for listed companies by 2022. Other governments that have endorsed the TCFD include Canada, Sweden and France; the latter already has legislation requiring climate disclosures from listed companies and institutional investors. In Australia, listed companies are required to disclose climate risks in their annual reports, and the New Zealand government is considering a similar proposal.
Financial regulators, concerned about the risks that climate change poses to financial stability, have begun to issue new guidance for banks and insurers that have repercussions for companies in the real economy. For example, the Bank of England is developing a climate stress test and has published requirements for climate risk management, including specific demands of the board, that all Bank of England-regulated firms — including U.K. subsidiaries of U.S. financial institutions — will need to demonstrate they meet by the end of 2021. This also has implications for the corporate sector, because as banks incorporate climate into their risk-management processes, they will require greater transparency of climate risks from the companies they lend to.
In time, similar regulatory approaches should be expected in the United States. A coalition of more than 70 investors, former regulators and leaders from the corporate and nonprofit sectors recently wrote to federal regulators asking them to incorporate climate risk into their activities. Chairman Jerome Powell has signaled that the Federal Reserve is likely to join the Network for Greening the Financial System — a group of more than 60 central banks and supervisors working to “contribute to the development of environment and climate risk management in the financial sector.” SEC commissioners have recently debated the inclusion of climate risk disclosures in SEC filings, while legislation that would mandate disclosure has been reintroduced to Congress, though it remains unlikely to pass.
Guy Carpenter has multiple experts in atmospheric and climate science across the globe that have been actively researching and consolidating the scientific literature. Our solutions can help clients make informed decisions about pricing, capital and risk management strategies.