Climate risk "is systematic, with global effects", according to Ortec Finance investment solutions director Saiyan Raja.
Therefore, Mr Raja said, “understanding the possible risks at a macro level is a great starting point”.
He said, “The three key components of systematic climate risk at a top-down level are: transition risk, physical risk and the market reaction, if at all. Scenario modelling, in some regions mandated by the regulator, has proven an effective tool for insurers to understand the impact on the balance sheet as a result of particular climate narratives.”
Transition risk
Mr Raja believes the risks of transitioning to a decarbonised economy are most immediate to insurers.
“A world that uses only a fraction of today’s fossil fuels would see profound economic shifts across industries, regions and financial markets,” he said. For instance, he indicated that fossil fuel exporting economies, such as Saudi Arabia and Russia, would experience a significant decline in GDP as revenues from oil, gas and coal exports shrink.
Moreover, he said, these nations are reliant on fossil fuel rents to finance public services, infrastructure and social programmes, making economic diversification a pressing challenge. Although some countries are investing in alternative industries, he noted that the transition remained uncertain for others.
“This decline in fossil fuel demand would also lead to a surge in ‘stranded assets’ (such as) oil reserves, coal mines and natural gas infrastructure that lose their economic viability. Companies with heavy exposure to these assets, including major oil firms and utilities, would face devaluations, credit downgrades and potential bankruptcies,” he also said.
Energy-heavy equity indices such as the S&P 500, could experience significant structural shifts as fossil fuel stocks shrink in value and clean energy firms take a larger share of market capitalisation, he believes.
“For institutional investors and asset owners like insurers, this transition poses risks to portfolio performance and necessitates reallocation strategies. Traditional energy investments may underperform, while sectors aligned with decarbonisation such as renewable energy, electric vehicles and energy efficiency technologies could become dominant,” Mr Raja said.
“Navigating these shifts requires proactive portfolio adjustments, scenario analysis and engagement with companies on transition plans to mitigate long-term risks.”
Physical risks
According to Mr Raja, acute physical risks, such as more frequent and intense hurricanes, wildfires, or flooding, can “disrupt infrastructure, displace populations and damage assets”.
“For example, rising sea levels and stronger storms increase the risk of coastal flooding, leading to higher insurance claims and depreciating property values in vulnerable areas like Southeast Asia,” he said.
“Wildfires, such as those seen in California and Australia, can destroy residential and commercial properties, strain public resources and impact investment portfolios with high exposure to these regions.”
Market reaction
Said Mr Raja, “How the market reacts to the risks borne out of climate change is an important component that insurers must be mindful of.”
He also noted that whether the market even reacted to transition risks and the materialisation of physical risks remained to be seen.
Other risks
In the long-term, Mr Raja expects increasing average temperatures to have uneven economic impacts across countries as well. For instance, he noted warmer climates may lead to declining agricultural yields and exacerbate food insecurity and economic stress.
On the other hand, he believes colder regions may experience longer growing seasons and new economic opportunities, which could benefit certain industries like agriculture and energy production.
Article link: https://www.asiainsurancereview.com/News/View-NewsLetter-Article/id/90755/Type/AIRPlus
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