Regulator Warns Climate Change Poses a Financial Risk

Interviewed June 10, 2019, by the NY Times, Rostin Behnam warned, “If climate change causes more volatile frequent and extreme weather events, you’re going to have a scenario where these large providers of financial products – mortgages, home insurance, pensions – cannot shift risk away from their portfolios.  It’s abundantly clear that climate change poses financial risk to the stability of the financial system.)  Mr. Behnam is one of the five members of the Commodity Futures Trading Commission.

This isn’t the first call to action.  The Securities and Exchange Commission began requiring public corporations to disclose bottom-line risks associated with climate change way back in 2010.  More recently, an international coalition of 39 central banks began studying the effects of climate change on financial markets. 

While the risks posed by natural disasters cannot be avoided, as Mr. Behnam points out, the tools are now available to quantify that exposure to a portfolio.  That’s the first step in mitigating the risk of a natural disaster impacting a portfolio of insurance policies, loans, accounts receivable, or investments. Being able to quantify the amount of exposure to potential weather events or other natural disasters also applies to vendor supply chains.

After that it is a relatively simple matter of taking those risk probabilities and evaluating their concentration within a portfolio.  We can identify the probabilities of businesses and households in California being impacted by wildfires, mudslides and earthquakes; along the Gulf Coast facing wind damage, storm surges and run-off caused by hurricanes; and in the Midwest being inundated by floodwaters.

Monitoring risk exposures is all well and good, but the process should start when you are vetting the loan prospect, customer, vendor or investment.  Underwriters and credit analysts have traditionally focused on financial risks, as well as political and currency risks when cross boarder transactions are involved.  Granted, insurers may look at environmental risks with some types of policies, but that factor can be overlooked with other products, leaving the door open for a natural disaster to impact a portfolio in unexpected ways.

Whether you are looking to upgrade your vetting process to include environmental risks or you want to identify and monitor your exposure to climate change events and other natural disasters across your portfolio, we can provide the site-based intelligence you need to implement an action plan. The potential savings will dwarf the costs of acquiring the actionable intelligence to mitigate your exposure.