Banks, insurers, and other financial institutions must do more to take into account the risks posed by climate change to their business, a Dutch Central Bank study said.
As global warming increases the risk of extreme weather events, regulators are giving more attention to its economic and market implications, with estimates showing that a single high-impact storm could cause damages of as much as 60 billion euros ($71 billion), according to the report published on Thursday. The Netherlands, which is largely below sea level, runs an inordinate risk of being affected by such events.
“Dutch insurers will have to deal with an increasing claims-burden as a result of climate-related damage,” the central bank said in the report. “This in turn may lead to shock-induced price rises in premiums. Furthermore, climate change is making it more difficult to estimate the likelihood of extreme weather.”
Bank of England Governor Mark Carney, chair of the G20’s Financial Stability Board, is spearheading an initiative to standardize financial-sector guidelines on how to disclose risks arising from climate change. Carney in late 2015 appointed former New York City Mayor Michael Bloomberg to lead the Task Force on Climate-Related Financial Disclosures, which issued its final recommendations in June. (Bloomberg is the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.)
Historical data used to assess Northern Europe’s future climate may become less effective as climate change accelerates, in turn rendering inaccurate current insurer pricing policies. In some extreme cases, insurance companies may be offering policies on things that, given the effects of climate change, should no longer be insured.
To counter such eventualities, the central bank said it intends to put in place climate stress tests and “embed climate-related risks more firmly in our supervisory approach and address them in our interviews with supervised institutions.”
The study also points out risks that may arise from the transition to a low-carbon economy. A majority of financial institutions have yet to include “all relevant energy label data in their risk management systems,” and this may undermine market acceptance and the “value of office buildings that do not meet this requirement.”
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