by Naeem Siddiqi
As consultants and bankers, my industry colleagues tend to think of climate risk in terms of regulations, disclosures, models, stress testing, and dollars and cents. The global climate change crisis sometimes seems so detached from our everyday lives, as if it’s a problem we can leave at the office (or home office, as is the case for many of us today). And yet we’ve already experienced – and will continue to see – more frequent and extreme severe weather events, each tremendously impactful on ecosystems, businesses, health and more. Consider, too, that certain factors driving climate change could potentially increase the likelihood of another pandemic. The thought is overwhelming. But we aren’t doomed. There are ways that we, both as a society and as individuals, can help steer humankind toward a greener future. Perhaps the one silver lining of the COVID-19 pandemic is that it provides opportunity for a “hard reset” on how we do business and how we (mis)use the planet. The question is, where do we start?
In response to climate change, by way of the The Paris Agreement, around 200 nations have agreed to enact measures to limit global warming to 2 degrees Celsius (2C) – preferably 1.5C – above pre-industrial levels. This means governments must deploy policy levers to, for example, lower greenhouse gas emissions and increase green energy production.
Consumer and investor sentiment is also fuelling the “greening” of industry. Banks, insurance companies and institutional investors, in light of consumer demand for environmental accountability, are already disassociating from enterprises and projects seen as contributing to climate change. For example, certain insurers will no longer insure activities in the Alberta oil sands. Likewise, many banks refuse to finance coal plants or oil drilling in environmentally sensitive areas (parts of Alaska, for example). And companies like BlackRock are voting against the boards of companies that don’t take adequate actions to tackle our climate crisis.
As a professional who works with financial firms to reduce risk and leverage analytics for sustainability, I tend to think of things in risk management terms. This corporate shift toward environmental consciousness will profoundly impact many companies and their supply chains. Entire industries will be disrupted. Shifting norms put the financial sector amid significant transition risk – even as banks and insurers face growing physical risk in the form widespread damage to physical structures and infrastructure due to the rising number of environmental disasters spurred by a changing climate (among them, hurricanes, floods, droughts and wildfires).
What do such risks have to do with everyday consumers like you and me? The impacts of these dual risks aren’t confined to financial institutions. And it isn’t the exclusive realm of businesspeople and policymakers to manage and plan for them. Indeed, there’s a good chance you will soon personally experience the reverberations of the changing planet – that is, if you haven’t already.
A consumer perspective on the physical risks of climate change
If you live in a part of the U.S. expected to experience more frequent flooding and/or hurricanes – Florida, New Orleans or Houston, for example – insurance premium hikes are all but inevitable. In some modelling scenarios, insurance companies predict some regions may become uninsurable as risks rise to levels that cannot be adequately priced. Insurance coverage loss will leave homeowners personally liable for physical damage. If your property is mortgaged, loss of coverage in most cases may put you in default.
The same scenario will affect small businesses, commercial real estate as well as large production facilities. We could see residents relocating away from affected areas, significant economic slowdowns and job losses, and supply chain disruptions – not unlike what we saw during the pandemic.
Consumers must be mindful of transition risks, too
As financing and insurance options for carbon intensive industries like mining diminish, people working in such fields could face employment uncertainty and, ultimately, widespread unemployment. Businesses that service those industries would face similar challenges. Migration from these regions, falling property values, and business failures are all potential domino effects. Furthermore, these factors could erode tax revenues and lead to a corresponding reduction in municipal services and the ability of governments to raise and service debt.
Beyond financial impacts, there are reputational risks. While touting green credentials is suddenly in vogue, today’s consumers are savvy and increasingly wary of “greenwashing.” They will increasingly favour companies who adopt meaningful, environmentally and ethically sustainable practices. Companies who “walk the talk” will find themselves at an advantage.
This explanation serves to illustrate another lesson we learned during the pandemic: Everything is interconnected. The business risks of climate change will affect us all. And successfully taking on climate risk will require coordinated, global effort at all levels.
We’re in this together
Despite the risks we face, we can mitigate the impact of climate change on our communities by taking action today. To start, regions dependent on at-risk industries must seize this window of opportunity to pave a new path forward.
For example, investment in green technologies such as carbon capture, energy production, e-cars, batteries and manufacturing redesign is steadily accelerating. Regional governments should incentivise these emerging industries to set up shop in areas reliant on declining industries. Workforce re-training could also help lessen adverse impacts.
Yes, but what can I do?
There is much each of us can do as individuals, at home and in our communities, to help curb climate change. Little changes can really add up. Here are a few ideas to get you started:
- Be conscious. You’ve heard these before, but they bear repeating. Recycle. Choose package-free when possible. Pick paper over plastic. Switch to energy efficient lightbulbs. Buy local produce. Make small, sustainable changes at home.
- Reconsider your transportation. Aim to drive and fly less. Less commuting means cleaner air and water. Choose more fuel-efficient modes of transportation. Drive a fuel-efficient car instead of a gas guzzler.
- Go for quality, reusable items. Use less throwaway goods. I have friends who have shifted away from “fast fashion,” buying less clothing but of higher quality that will last longer. It’s a great practice that promotes sustainability.
- Shop wisely. Never underestimate the power of consumers to drive positive change. Reflect on who you do business with, and vote with your pocketbook. Consider, is the company (or brand) using sustainable methods to create their products? Are they using “clean” packaging? Are they adopting green practices?
- Be an advocate. Policymakers and governments need more convincing. Contact your legislators. Use your voice to help create a positive impact. Join environmental organisations and online forums.
Serious about reducing your carbon footprint? Check out the Nature Conservancy’s carbon footprint calculator.
The “Better Normal”
Our behaviours as individuals will determine where we go as a society. We all have the power to help drive the change we want to see, by shrinking our own carbon footprints and influencing businesses to do the same. We must choose to patronise businesses that make real sustainable choices available – even if that means paying a slightly higher cost. That extra expense is necessary to reverse yesteryear’s less sustainable practices and ensure a better future.
The COVID-19 pandemic has shown us what a true global crisis looks like. Now, more than ever, we recognise that today’s choices will have impacts for decades to come. There’s no time to waste. If we choose wisely, tomorrow’s “new normal” can turn into a collective “better normal.”
The author, Naeem Siddiqi is a Senior Advisor in the Risk Research and Quantitative Solutions division at SAS, where he advises C-level bankers on issues around credit scoring and decisioning, risk strategy, climate change risk, AI/ML in credit risk and modernising analytics infrastructures. He has worked in retail credit risk management since 1992, both as a consultant and as a risk manager at financial institutions, during which time he has educated bankers in more than 25 countries on the art and science of credit scoring. Naeem is also the author of Intelligent Credit Scoring: Building and Implementing Better Credit Risk Scorecards (Wiley and Sons, 2017) and Credit Risk Scorecards: Developing and Implementing Intelligent Credit Scoring (Wiley and Sons, New York, 2005). He has an honors bachelor’s degree in engineering from Imperial College of Science, Technology and Medicine at the University of London and an MBA from York University in Toronto.