Climate Change Bottom-Line Talk Grows, S&P Director Says

Companies and governments worldwide are changing their behaviors and examining their risks in the face of climate change, a managing director for Standard & Poor’s said, holding up the insurance industry as a good example of how to adapt to a world with greater natural risks.

Steve Dreyer, managing director of Standard & Poor’s U.S. utilities and infrastructure ratings, and Dan Utech, special assistant to President Barack Obama on energy and climate change, during a conference call on June 16, talked about how insurers and investors are including climate change and severe weather in their risk assessments and decision-making processes.

The discussion was hosted by Business Forward, a nonprofit group that works with businesses and government, and it happened just two weeks after the U.S. Environmental Protection Agency released new carbon standards for power plants.

There has been some backlash against the new regulations, which call for existing U.S. power plants to reduce their greenhouse gas emissions at least 30 percent below 2005 levels by 2030. A report by the U.S. Chamber of Commerce shows that as a result of the regulations the economy will take an $859 billion hit by 2030 and Americans will pay more for electricity, see slower economic growth and experience fewer jobs created.

Carbon Emissions Footprint

Utech said the new regulations, expected to be finalized next June, are tailored for each state, putting each in charge of how it reduces its own emissions.

“States are really in the driver’s seat,” he said.

By June 2016, states will be required to submit initial plans to comply with the new standards, and states participating in multi-state efforts have until 2018. States can meet these reduction standards by a combination of measures, Utech said.

Mitigate Risks

Despite the fears over regulation, S&P has noticed more companies looking at their exposures, Dreyer said.

“We always are looking at the potential impact of these kinds of things on the ability of companies and governments to repay their debt obligations,” Dreyer said.

Among the thousands of companies and governments S&P rates, many are beginning to look at ways to mitigate risks and protect their bottom-lines, according to Dreyer.

A good template for such practices may already exist.

When Hurricane Andrew struck the Southeast U.S. in 1992, it sent nearly a dozen carriers under. However, a decade later when Katrina struck and decimated New Orleans and surrounding areas, no insurers declared insolvency, Dreyer noted.

The industry has learned to better model for catastrophe. Following Andrew, carriers better structured their risks so as not to be taken down by any one large catastrophe, Dryer said.

“The insurance industry demonstrated that the effects of extreme weather can be managed,” he added.

Green Bond Market

Other sectors are catching on. Several industrial companies, for example, are turning to bond investors to finance ways to mitigate risk, including turning to the green bond market, which is taking off in Europe, according to Dreyer.

“We see that market being very attractive to investors,” he said.

The green bond market, which is now worth roughly $10 billion annually, is expected to continue to see fast growth as pensioners, sovereign wealth funds and other investors view these bonds as a diversification play from their typical investments, as well as a way to make a certain percentage of their portfolio green, Dreyer said.

“Our projection is that this year it will double to $20 billion,” he added.

In a follow-up interview with Insurance Journal Dreyer said the takeaway from his talk isn’t that S&P is looking at portfolios in different ways due to climate change to conduct ratings, but that the companies themselves are acting differently in the face of threats such as more frequent severe storms, rising sea levels and drought.

“I wouldn’t say that we are doing anything radically different,” Dreyer said. “What we are saying is the behaviors are changing among the companies that we rate. They’re looking at risk in a different way.”

Just how worst case scenarios may play out, forming contingency plans, looking at regulations and how to adapt to future regulations, examining the way natural catastrophe exposures are affecting the bottom-line, those are part of the evaluations a growing cadre of companies are now undertaking, Dreyer said.

Topics USA Legislation Climate Change Pollution