Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Leadenhall assists on physical climate risk disclosure guidelines


The Climate Measurement Standards Initiative (CMSI), an Australian led collaboration on the physical risks of climate change and their disclosure, has developed a set of open-source, voluntary guidelines to help banks, financial institutions and insurers better assess the risk and quantify the costs of climate-related damage.

climate-change-adaptationLondon-headquartered insurance-linked securities (ILS) and reinsurance linked investment manager Leadenhall Capital Partners assisted with the work, alongside reinsurance sector giants Munich Re and Swiss Re, as well as Australian insurers and financial corporations QBE, Suncorp, IAG, RACQ, NAB, Westpac, Commonwealth Bank, HSBC Australia, MinterEllison, the Investor Group on Climate Change and Climate-KIC Australia.

The work, between climate scientists, insurers and the finance sector, has produced guidelines on assessing the physical risks – such as tropical cyclones, bushfires and floods – of climate change to homes, buildings and critical infrastructure.

The “consistent scientific and technical guidance” is expected to help Australian financial companies, as well as insurance and reinsurance entities, better assess the risk of climate-related damage to their buildings and critical infrastructure.

Chris Lee, CEO of Climate-KIC Australia and convenor of the CMSI commented, “This has been an historic collaboration between Australia’s leading industry, scientific and financial experts. The Australian financial sector needs to assess how cyclones, floods, hailstorms, fires, droughts, heatwaves and coastal inundation will likely affect their assets.

“The CMSI provides guidelines specific to Australian conditions. Consumers will have confidence in the resulting disclosures because they’ll be understandable, consistent, comparable and supported by Australia’s leading climate experts.”

Emma Herd, CEO of the Investor Group on Climate Change added, “The intensifying and compounding extreme weather events that are being fuelled by climate change pose a significant risk to the value of assets in investors’ portfolios and, in turn, the sustainable returns for millions of Australians through their superannuation. These new standards will help investors understand their exposure and adjust portfolio strategies accordingly.”

ILS investment management specialist Leadenhall Capital Partners got involved as part of its work on climate risk and environmental, social, governance (ESG) and sustainability related issues.

Given the ILS fund managers expertise in underwriting climate exposed catastrophe reinsurance risks and providing portfolios of such risks to investors looking for relatively uncorrelated returns, the company, like others across insurance and reinsurance, is keen to assist initiatives that can help in climate risk being better understood and priced.

The CMSI aimsto support the G20 Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD), that previously made recommendations on how to disclose risks associated with climate change to stakeholders.

At their core, these initiatives look to help those holding climate exposed assets measure, quantify and value the exposure to climate change embedded in assets, infrastructure and buildings, then have them disclose and manage their exposure to climate risk.

The guidelines are summarised as:

The financial disclosure guidelines aim to increase the ability to understand and plan for climate change by improving the comparability of climate-related financial impact disclosures by banks, insurers and asset owners.

Broadly, the guidelines recommend disclosures should be made for 2030 and 2050, with consideration for shorter time frames aligned with business planning and 2090 if relevant. When material to the business, disclosures should be split up by portfolio (e.g. home loans, commercial loans, commercial insurance, personal insurance), by hazard (e.g. tropical cyclones, floods, bushfire etc.) and by geographic region. Specific accounting items and metrics (listed in the CMSI guidelines) should be disclosed, in line with existing financial reporting accounting standards. Disclosures should describe both the confidence and uncertainty in the critical assumptions made, with the scientific report providing views on the confidence in expected behaviour of physical risks under the two scenarios. Resilience can be disclosed via several factors (listed in the CMSI) and will be more closely developed over time.

It is only through the understanding and measurement of climate change related risks and threats, that asset owners and holders can work to mitigate, offset and transfer their exposures, with insurance, reinsurance and indeed instruments such as insurance-linked securities (ILS) set to play a significant role going forwards.

Guidelines of this kind help to inform, educate and prepare corporations and asset owners/holders to begin to think about climate risk as something that can be measured and managed, or transferred where appropriate.

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