RISK: Investors must get serious about adapting to climate change

The total cost of the Fort McMurray fire may be as high as $9 billion

A version of this article first appeared on BenefitsCanada.com

Climate change and extreme weather events threaten business continuity and, by extension, cash flow across all business sectors. However, as damaging as floods, droughts, wildfires, wind, hail and ice storms may be today, scientists predict weather-related challenges will exacerbate as greenhouse gas emissions increase in concert with a growing population of 1.5 billion more people on the planet by 2030.

Against this formidable backdrop, and with certainty that climate will continue to change, how should investors respond to limit risk exposure and maximize future returns?

First, portfolio managers must recognize that climate change and extreme weather events are real problems, with significant costs to businesses and municipalities. To illustrate, the wildfire in Fort McMurray, Alta., forced the evacuation of more than 80,000 people, destroyed more than 3,000 structures and stalled oil production for Suncor, Syncrude and other northern Albertan oil producers for two weeks.

According to the Bank of Montreal, the total cost of the fire may be as high as $9 billion.

Read: Companies know climate change is real

Prior to the Fort McMurray disaster, the Alberta flood of 2013 was the costliest natural disaster in Canadian history. The Alberta government estimated the total cost of losses at $6 billion. The Canadian Pacific Railway lost $25 million in revenues due to extensive network outages and track washouts across Alberta and British Columbia, including the temporary halted supply of potash from companies in Saskatchewan. Consumers, facing shipment delays, increased fuel usage and extra detour mileage, were the ones ultimately burdened by the costs.

Once portfolio managers recognize that climate change poses a new set of risks to investors, they’ll also need to understand whether the companies they’re investing in have considered them and taken action to address them. Encouraging companies to be proactive about disaster assessment and mitigation is good businesses as it prevents business disruptions and the associated revenue losses.

For example, following the 2011 flood in Thailand, Western Digital — one of the world’s largest hard-disk manufacturers — fared poorly compared to its competitor, Seagate. Western Digital lost 45 per cent of its shipments because its factories were inundated with water. By contrast, Seagate only lost eight per cent of its shipments since the company had performed disaster assessments of its factories and transportation routes to identify and limit vulnerabilities by, for example, not locating its factories in flood zones.

Read: Under pressure: brokers try to deal with the Fort Mac claims crunch

Canadian investors must consider climate risk across their real assets. According to the Insurance Bureau of Canada, payouts for extreme weather have doubled every five to 10 years since the 1980s. Since 2009, annual insured losses averaged around $1 billion, compared to an average of $400 million from 1983 to 2008. To keep up with losses, insurance premiums will likely rise. In some disaster-prone areas, companies may withdraw insurance altogether.

This trend will affect the profitability of real assets — real estate, roads, bridges, tunnels, airports and transit systems, as well as energy, water and wastewater systems — as they become increasingly exposed to the physical damages of extreme weather.

Investors must evaluate these rising costs and invest in protecting their real assets. For example, protecting commercial real estate from floods may include such measures as elevating critical equipment above flood elevations and installing backup power. Building right is cheaper than retrofitting, so it’s important to consider weather-resiliency measures at the time of project inception.

Read: Up from the ashes: Restoration teams are rapidly putting Fort McMurray back together

The Fraser Basin Council recently estimated that a major flood along the B.C. coast or the Fraser River could result in $32 billion in losses. This estimate surpasses the losses of the Fort McMurray fire and the Alberta floods combined. In short, investors can’t ignore the magnitude of the climate change challenge.

Asset managers must identify capital at risk and then invoke or encourage adaptation measures that mitigate the exposure and create competitive advantage.

Natalia Moudrak is director of the Natural Infrastructure Adaptation Program at the Intact Centre on Climate Adaptation, part of the faculty of environment at the University of Waterloo.

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