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 pension funds 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: What is the role of benefits programs in supporting Fort McMurray victims?

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: Canadian pension funds rank poorly on climate change: report

Canadian pension funds 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.

Pension funds 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: Top 40 Money Managers: Why pension funds are turning to non-core infrastructure

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, pension funds can’t ignore the magnitude of the climate change challenge.

Pension funds 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.

Copyright © 2018 Transcontinental Media G.P. Originally published on benefitscanada.com

Benefits Canada Newsletter

For the latest industry news and opinions, sign up for our daily newsletter.

See all comments Recent Comments

Nigel Pigott:

The rise in insurance payouts is not related to an increase in extreme weather, but rather to an increase in the quantity and price of things insured. You can’t look at the value of the payout (which is what this article has done) and conclude that the disaster was worse than any other disaster in years past. There have been plenty of fires and floods in the past that were just as bad, if not worse. It just so happens that expensive things were not damaged. This time expensive things were damaged. The cost of things have nothing to do with climate change.

I do agree that we should not build on flood plains, but that is not a new idea that has come from thinking about climate change, it is has always been there. And the fact that they are called ‘flood plains’ should tell you that ‘modern’ climate change has nothing to do with the idea that you shouldn’t build on a flood plain!

Finally, unless there is some actual evidence suggesting that a major flood is a good possibility on the Fraser Basin, that scenario described at the end of the article is ‘alarmism’ in all it’s glory.

Globally, there is no increase in extreme weather.
http://euanmearns.com/climate-scientists-confirm-no-global-increase-in-extreme-weather-events/

Monday, June 20 at 6:20 pm | Reply

Add a comment

Have your say on this topic! Comments that are thought to be disrespectful or offensive may be removed by our Benefits Canada admins. Thanks!

* These fields are required.
Field required
Field required
Field required