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Physical and financial risk
TRANSITION RISKS
In its seminal report published in 2015, the Bank of England identified three primary risk factors inwhich climate change is likely to impact on the insurance sector 11 – which it has subsequently re-iterated in its 2018 follow-up review of the banking sector 12 . The BoE’s remit may rest with financial services and the extent to which climate change could undermine the stability of financial systems, but since banking and insurance are central cogs in the engine of the wider economy, the wider implications for businesses of all stripes (as well as their investors and insurers) are clear. Broadly these 3 key risks are:
The financial risks which could arise from the shift to a lower-carbon economy as carbon-intensive financial assets are re- priced, perhaps rapidly, potentially causing shocks to share prices. As BoE Governor Mark Carney has explained: “Changes in policy, technology and physical risks could prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent.” 13 The risk that parties who have suffered loss or damage from climate change seek to recover losses from those they deem to have been responsible. As the BoE notes, “Such claims could come decades in the future.” Clearly, the first two risk factors highlighted here have profound implications for the third risk factor – liability. We look at each factor in more detail next, in the context of an evolving litigation landscape. LIABILITY RISKS
PHYSICAL RISKS
The impact on asset values and insurance liabilities from damage to property as a direct result of severe weather events such as storms or floods,or indirectly fromfactors such as business interruption caused by disruption to global supply chains.
11 https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/publication/impact-of-climate-change- on-the-uk-insurance-sector.pdf?la=en&hash=EF9FE0FF9AEC940A2BA722324902FFBA49A5A29A 12 https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/report/transition-in-thinking-the-impact- of-climate-change-on-the-uk-banking-sector.pdf?la=en&hash=A0C99529978C94AC8E1C6B4CE1EECD8C05CBF40D 13 https://www.bankofengland.co.uk/-/media/boe/files/speech/2015/breaking-the-tragedy-of-the-horizon-climate- change-and-financial-stability.pdf?la=en&hash=7C67E785651862457D99511147C7424FF5EA0C1A
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