Unique natural events caused by the effects of climate change need to be considered in a financial organization’s risk analysis, according to a new report by the Canadian Institute of Actuaries.
The report examined work and recommendations of the task force on climate-related financial disclosures on climate risk frameworks for the Canadian financial sector. It found climate pattern changes include temperature, precipitation and sea level rises, which can all impact the economy, health and safety, infrastructure and culture of an organization, so a risk analysis framework that doesn’t include climate considerations will likely be insufficient.
A nature risk is the potential negative impact within an organization or within the wider society that comes from a dependency on nature, says Michael Tencer, assistant vice-president of capital projects at Manulife Financial Corp and who was the report’s lead author. “If nature is degrading, then that could create financial risk.”
Read: Climate change, pension super-priority law among CIA’s priorities for 2024
If a financial organization depends on the ecosystem and natural resources, then it needs to address potential risks from climate change events. Indeed, the report suggested Canadian financial regulators will have to strengthen the foundation of climate-risk modelling to better understand the impact from nature-related risks.
“Any sort of policy changes that are implemented or enacted to try to mitigate some of these physical risks could, in and of themselves, create losses that would also be considered a nature-related transition risk,” he says.
However, Tencer acknowledges that the financial industry is starting to develop these climate scenario analysis exercises and develop capabilities of how to perform the scenario analysis and digest the results. But there’s still a long way to go for countries to meet standing global targets attempting to curb the impact of climate change.
“Nature risk is not going away anytime soon,” he says, noting if nature risks are ignored in scenario analysis, it could be dangerous and a potentially expensive choice for organizations.
Read: Canadian actuaries calling for mandatory financial reporting around climate change