Financial exposure due to climate change: How to adapt quickly

Financial exposure due to climate change: How to adapt quickly

Human life “as we know it” could be threatened by climate change states economists at JP Morgan.  BlackRock CEO Larry Fink, the head of asset management for $7 trillion announced on Tuesday February 25, 2020 that his firm will now make climate change central to its investment decisions going forward. Climate change has resulted in a warmer atmosphere that stores more energy leading to increased weather variability – watch this video to learn more about how global warming impacts natural disasters. This in turn generates more uncertainty and risk for the financial sector, especially for those invested in weather-driven sectors like agriculture, energy and transportation. Total insurance losses for weather-related events reached 0.1% of GDP in 2018, with total economic losses approximately double that amount. The number of catastrophes caused by natural hazards increased from 249 in 1980 to 820 in 2019, peaking at 848 in 2018.

Increasing financial risk in the agriculture sector

The US Federal Government implements a number of programs that mitigate risk in agriculture, including the Federal Crop Insurance Program (FCIP), Agriculture Risk Coverage (ARC), Price Loss Coverage (PLC), and several others. The FCIP provides subsidized insurance, while other programs provide payments to farmers in response to adverse production or market conditions. Together, the annual cost of these programs have averaged about $12 billion during the past decade. Year-to-year fluctuations in these costs are heavily influenced by weather variability, which affects yields and prices. The Federal Government’s cost exposure is expected to increase as weather averages and extremes change over the coming decades (USDA).

What can be done to reduce financial risk today?

  • Global network of weather resources that can be integrated to know where risk is increasing. There is a wealth of public (e.g. NOAA, ECMWF) resources for weather data and forecasts that can be combined with commercial weather resources to provide unprecedented insights into weather pattern shifts that impact on food security and logistics for a range of sectors. aWhere has been at the vanguard of integration of observed weather data to provide such insights and local weather trends to help farmers adapt to climate change and investors understand the evolving risks of farm loans so strategic investments can be made to deliver economic resilience to climate change. These insights can be scaled up to a national level to help governments prioritize investments and policies to reduce the risks associated with increased weather variability and extreme events. 
  • Weather index insurance is a promising instrument to help farmers manage their financial exposure to extreme events but the cost of operating these has been high. One reason for the high cost is using old weather data for actuarial tables that don’t take into account recent changes to local weather patterns. Also, the cost of operating many weather stations is cost-prohibitive when one considers the maintenance costs. aWhere is now offering solutions to these constraints to make weather-indexed insurance offerings more affordable and timely to respond to the needs of insurers and farmers.  By lowering the operational cost of these services, they become more affordable to farmers to help them recover from floods and other disasters
  • Investing in the future. With increased weather variability we see the need for changes in cropping systems, farm management practices and infrastructure investments to empower farmers to adapt, reduce risk and increase their profitability. aWhere has helped national governments in Africa understand the shifts in local climates and how best to respond through investments in watershed management to dampen the effects of more intense and infrequent rainfall events. aWhere is working with Mobile Network Operators to deliver weather-based recommendations to increase the efficiency of farm operations and provide early warning of threats to crop production such as diseases, pests or extreme weather.

We can adapt to climate change through the application of weather data science, partnerships and understanding the context in which solutions need to be delivered to empower farmers, investors, governments and consumers so we can collectively Adapt Our World to Climate Change.