Climate change and financial stability

Breaking the Tragedy of the Horizon – climate change and financial stability

Mike Carney, Governor of the Bank of England Chairman of the Financial Stability Board, gave its speech at Lloyd’s of London, 29 September 2015.

He focuses on the facts and the consequences for our architecture of government, safety, insurance and financial stability of the world economy. A quote:

“There are three broad channels through which climate change can affect financial stability:

First, physical risks: the impacts today on insurance liabilities and the value of financial assets that arise from climate- and weather-related events, such as floods and storms that damage property or disrupt trade.
Second, liability risks: the impacts that could arise tomorrow if parties who have suffered loss or damage from the effects of climate change seek compensation from those they hold responsible. Such claims could come decades in the future, but have the potential to hit carbon extractors and emitters – and, if they have liability cover, their insurers – the hardest.
Finally, transition risks: the financial risks which could result from the process of adjustment towards a lower-carbon economy. Changes in policy, technology and physical risks could prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent.

While the attribution of increases in claims to specific factors is complex, the direct costs of climate change are already affecting insurers’ underwriting strategies and accounts. For example, work done here at Lloyd’s of London estimated that the 20cm rise in sea-level at the tip of Manhattan since the 1950s, when all other factors are held constant, increased insured losses from Superstorm Sandy by 30% in New York alone.

The speed at which such re-pricing occurs is uncertain and could be decisive for financial stability. There have already been a few high profile examples of jump-to-distress pricing because of shifts in environmental policy or performance.

Risks to financial stability will be minimised if the transition begins early and follows a predictable path, thereby helping the market anticipate the transition to a 2 degree world.”

Download the speech here. Listen to his speech his: