Transcript Report template - Tanzania Insurance Broker Association

Climate Change and Its Effect on the Financial Sector
“Our world has entered an era of unprecedented environmental
and social challenges. This creates the need to develop economies
that are more sustainable and, at the same time, more profitable
and competitive”
October 2015
Disclaimer
This presentation is made by KPMG Kenya, a member firm of the KPMG network of independent
firms affiliated with KPMG International, a Swiss cooperative. KPMG International provides no
client services. No member firm has any authority to obligate or bind KPMG International or any
other member firm vis-à-vis third parties, nor does KPMG International have any such authority to
obligate or bind any member firm.
This presentation has been prepared solely and exclusively for the benefit, information and use by
the participants of Tanzania Insurance Brokers Association Conference and for the sole and
exclusive purposes of communicating material related to the conference. These slides cannot be
used by the participants of the conference for any purposes other than as expressly stated herein;
neither can these slides be disclosed to, referred to, or used by, any other third party. KPMG
accepts no liability or responsibility whatsoever, resulting directly or indirectly from the disclosure
of the presentation contents to any third party and/or the reliance of any third party on the
contents of the presentation, either in whole or in part, and the participants of the workshop
agrees to indemnify KPMG in this respect.
©2015 KPMG Kenya, a Kenyan partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
Page 1
Contents
01
Introduction
02
Climate change and the financial sector
03
Sustainability megaforces
04
Value at stake and adaptation
05
Climate change threats and opportunities in the financial sector
©2015 KPMG Kenya, a Kenyan partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
Page 2
1
Introduction
Climate change- Definition
Climate change……
Is a change in global or regional climate patterns.in particular a change apparent from the mid to late 20th
century onwards and attributed largely to the increased levels of atmospheric carbon dioxide produced by
the use of fossil fuels.
Oxford Dictionary.
"Climate change" means a change of climate which is
attributed directly or indirectly to human activity that
alters the composition of the global atmosphere and which
is in addition to natural climate variability observed
over comparable time periods.
-
United Nations
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International”), a Swiss entity. All rights reserved.
Page 4
Drivers of Climate Change
The two drivers of climate change are:
Human Activities
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International”), a Swiss entity. All rights reserved.
Natural Processes
Page 5
Drivers of Climate Change
Some of these natural processes include:
1
Energy output from the sun
2
Variation in the earth’s orbit and the orientation of its axis
3
The greenhouse effect of water vapour and other trace gases
4
Volcanic and meteorite activity and plate tectonics
©2015 KPMG Kenya, a Kenyan partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
Page 6
Drivers of Climate Change
Burning fossil fuels
Farming
Deforestation
Human activity
Waste breakdown &
landfill
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International”), a Swiss entity. All rights reserved.
Industrial Activities
Page 7
Impacts of Climate Change on Natural Resources
1.
Reduction of forests and vegetation cover due to drought, forest fires, pests and invasive species
present additional stressors to forests
2.
Loss of biodiversity due to negative changes in the habitats of native and endangered plant and
animal species
3.
Scarcity of water available for industrial use, renewable energy production and waterways due to
insufficient rainfall
4.
Excessive water supply leading to frequent flooding, land erosion, shoreline damage and decreased
water quality due to increased runoff and debris
5.
Unavailability of fish and wildlife due to harsh environmental conditions
6.
Drying up of rivers and wetlands leading to droughts and shifting of plants and animals
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International”), a Swiss entity. All rights reserved.
Page 8
2
Climate change & the
financial sector
Impacts of Climate Change on the Financial Sector
1.
Economic costs of climate change - At a mean global temperature increase of 3°C, conservative
assumptions imply moderate economic costs rising to 3% of global GDP annually
2.
Shifts in political frameworks - International and national political frameworks to combat climate
change have been put in place
3.
Shifts in investors’ awareness - Investors are becoming more concerned about climate change and
corporate responses to it
4.
Macroeconomic impacts such as the expected reduction in productivity and economic growth
reducing per capita incomes
5.
Direct physical impacts of climate change such as floods and storms affecting assets and investments
6.
Indirect and knock-on effects of climate change i.e. adverse weather resulting in a change of the credit
worthiness or solvency of clients
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International”), a Swiss entity. All rights reserved.
Page 10
Role of Financial Sector in Climate Change
1.
The financial sector presides over a large pool of capital, more of which should be steered towards low
carbon, climate resilient activities
2.
Capital and investment flows in the financial sector need to shift from high to low carbon activities
3.
Financial sector needs to manage risks and capture new opportunities arising from climate change
since climate change is a systemic activity impacting all the sectors of the global economy
4.
The financial market system must be effective so as to that financial markets can respond better to
managing systemic risks such as climate change
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International”), a Swiss entity. All rights reserved.
Page 11
3
Sustainability
Megaforces
Global Sustainability Mega forces
• There is a set of ten global sustainability mega forces that will impact every business over the next two
decades
• The mega forces were identified based on quality numerical projections, key pressures causing global
environmental and social problems and the most significant consequences of those pressures for
natural and human security
• The mega forces do not function in isolation from each other but act as a complex and unpredictable
system, feeding, amplifying or ameliorating the effects of others
• Business leaders seeking to manage the risks and harness the opportunities of the future must
understand how these megaforces function and how they might affect their own organizations
©2015 KPMG Kenya, a Kenyan partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
Page 13
Global Sustainability Mega-forces
Climate Change
Material Resource Scarcity
Energy & Fuel
Food Security
Urbanization
Water Scarcity
Wealth
Population Growth
Ecosystem Decline
Deforestation
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International”), a Swiss entity. All rights reserved.
Page 14
Climate Change
• It is the one global mega force that directly impacts all other global mega forces
• Predictions of annual output losses from climate change range between 1% per year, if strong and early
action is taken, to at least 5% a year if policymakers fail to act.
• There are six key types of risk to businesses from climate change:
Physical Risk
Social risk
Regulatory Risk
Litigation Risk
Reputational Risk
Competitive Risk
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International”), a Swiss entity. All rights reserved.
Page 15
Interaction of Global Sustainability Mega forces
The global sustainability mega forces while significant individually, they are also closely interwoven with each
other. A few examples of this include:
1
Population Growth and Wealth increase Energy use which drives Climate Change
2
Climate Change increases Water Scarcity and Food insecurity which combine to drive Urbanization as
more people head for cities to escape deprivation
3
Climate Change and Material Resource Scarcity drive Deforestation which in turn causes Ecosystem
Decline
4
Deforestation circles back to drive Climate Change as there are fewer trees to absorb carbon in the
atmosphere
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International”), a Swiss entity. All rights reserved.
Page 16
4
Value at Stake and
Adaptation
Mega forces impacts by Sector
• KPMG performed a quantitative and qualitative review of the business risks and opportunities facing
key sectors of the economy in line with the Industry Classification Benchmark (ICB) system
• The following industry sectors facing the greatest risks from global sustainability mega forces and have
the potential to harness the greatest opportunities were identified:
Sectors
Airlines
Industrial Metals & Mining
Automobiles
Mining
Beverages
Marine Transportation
Chemicals
Oil & Gas
Electricity
Telecommunications & Internet
Food Producers
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International”), a Swiss entity. All rights reserved.
Page 18
Environmental Intensity - A Clearer Picture
The findings of the KPMG review are:
• Industrial Metals has achieved the greatest improvement of the 11 sectors in terms of its
environmental intensity, however the sector’s significant growth in earnings over the period helped it to
gain this position
• Mining has achieved a similar improvement in its environmental intensity but has also recorded the
largest increase of all 11 sectors in its external environmental costs
• A cluster of sectors – Automobiles, Chemicals and Electricity – have improved their environmental
intensity while also achieving negative or low growth in the external environmental costs they incur.
This suggests that these three sectors are coming the closest to decoupling their economic growth from
environmental impact
• Food Producers and Beverages have shown the lowest rates of environmental intensity improvement.
Food Producers is the only one of the 11 sectors that, according to the data, has not improved its
environmental intensity at all over the last eight years
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International”), a Swiss entity. All rights reserved.
Page 19
Demonstrating the Value at Stake
Profits Lost
The findings of the KPMG review are:
• External environmental costs could account for a considerable proportion of earnings (EBITDA) and
thus represent significant business value potentially at stake: across the 11 sectors, the average
external environmental costs per dollar of earnings would have been approximately 41 cents in
2010
• According to the data, Food Producers had the largest external environmental cost footprint of
the 11 sectors in 2010 at US$200 billion, followed by Electricity at US$195 billion and Oil & Gas at
US$152 billion
• External environmental costs of the Food Producers could outweigh the sector’s entire earnings.
For five other sectors (Electricity, Industrial Metals, Mining, Marine Transportation and Airlines)
environmental costs could account for more than half of earnings
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International”), a Swiss entity. All rights reserved.
Page 20
Adapting to Climate Change
What is adaptation…
• Adaptation refers to activities that reduce harm or risk of harm, or realize benefits associated with
climate variability and climate change
• The physical risks of climate change and their consequences, pose immediate and long-term threats to
operations
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International”), a Swiss entity. All rights reserved.
Page 21
Qualitative Review-Adaptation Finance & Investing
• There is a growing need to support adaption measures, particularly in the poorest countries and
communities where the physical risks are high and the capacity to respond insufficient
• According to the World Bank and UNDP, estimates of the annual adaptation costs in developing
countries alone range from $9-41 Billion and up to $86 Billion respectively
• The financial sector’s involvement in adaptation finance is currently very small with most involvement
from development aid from UNFCCC
• The link between development aid and adaptation financing often makes the involvement and role of
the private sector more complex
• Insurance has a key role to play in assisting industry adapt and respond to climate change risk
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International”), a Swiss entity. All rights reserved.
Page 22
Qualitative Review-Adaptation Finance & Investing
The enabling factors for the financial sector to get involved with adaptation finance and investing include:
Modelling capabilities
• Catastrophe risk capability
Financial engineering skills
• Weather risk products
Better and more accurate climate information and services
• International Financial institutions, government , insurance and financial sector partnership
• Weather index technology?
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International”), a Swiss entity. All rights reserved.
Page 23
Qualitative Review-Adaptation Finance & Investing
Main ways the financial sector can get involved with adaptation finance and investing include:
1.
Insurance and reinsurance companies providing insurance solutions to help communities manage
climate change related risks (We shall discuss potential threats and opportunities that the
insurance industry can realize)
(This is already happening)
2.
Infrastructure spending projects on adaptation to insure against climate change and to help societies
adapt
3.
Sensitization on insurable risks emanating from climate change
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International”), a Swiss entity. All rights reserved.
Page 24
4
Climate Change Threats and
Opportunities
General Insurance
• Potential Threats
 New and existing markets become unviable as climate change increases regional exposure
 Asset management risks; loss of long-term value in securities affected by adaptation/mitigation
regulations and measures
 Compounding risk across entire portfolio of converging activities (asset management, insurance,
reinsurance)
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International”), a Swiss entity. All rights reserved.
Page 26
General Insurance
• Potential Opportunities
 Use of pre-existing insurance tools (e.g. Errors and Omissions insurance to protect against errors
in forward selling of climate-influenced contracts; Business Interruption insurance to be better
prepared than competitors)
 Technology insurance and/or contingent capital solutions to guard against nonperformance of
clean energy technologies due to engineering failure
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International”), a Swiss entity. All rights reserved.
Page 27
Property / Casualty Insurance
• Potential Threats
 Physical damage to insured property from extreme/more frequent weather events unbalancing
insurer’s assets and liabilities
 Liquidity problems due to same
 Increases in population and infrastructure densities multiply size of maximum potential losses
from extreme weather events
 Regulatory change, for example relating to design standards
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International”), a Swiss entity. All rights reserved.
Page 28
Property / Casualty Insurance
• Potential Opportunities
 Increase in demand for underwriting services as weather risk increases
 Insurance of GHG offset and clean energy projects and related financial services e.g. professional
indemnity for carbon credit guarantors and certifiers
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International”), a Swiss entity. All rights reserved.
Page 29
Life insurance
• Potential Threats
 Increased risks to human health (thermal stress, vector-borne disease, natural disasters)
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International”), a Swiss entity. All rights reserved.
Page 30
Life insurance
• Potential Opportunities
 Increase in global demand for L/H insurance as human health risk increases
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International”), a Swiss entity. All rights reserved.
Page 31
Other
• Potential Threats
 Business interruption risks becoming unpredictable and more financially relevant
 Disruptions to construction/transportations sectors
 Increased losses in agro-insurance
 Political/regulatory risks surrounding mitigation
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International”), a Swiss entity. All rights reserved.
Page 32
Other
• Potential Opportunities
 Collaboration with others in pooling capital to expedite Kyoto mechanisms
 Microinsurance
 Weather derivatives
 CAT Bonds
 Consulting/advisory services
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International”), a Swiss entity. All rights reserved.
Page 33
Addition
07
Comment
Questions
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International”), a Swiss entity. All rights reserved.
Page 34
Contact us
KPMG Kenya
8th Floor, ABC Towers
Waiyaki Way
P O Box 40612, 00100 GPO
Nairobi, Kenya
Tel: 254 (20) 280 6000
254 729 110 597
Fax: 254 (20) 221 5695
www.kpmg.com
Contact us
David Leahy
Partner – Risk Consulting
T 254 20 280 6191
E [email protected]
Bernard Kiore
Senior Advisor – Risk Consulting
T +254 20 280 6137
E [email protected]
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