Rising waters, rising risks: floods and the global financial tide of climate change
I recently wandered into Henley-on-Thames, my hometown. After what seemed like weeks of rain, the Thames had well and truly burst its banks, and Henley was slowly slipping underwater.
It rains every winter, and the river overflows its banks every year. But this year, it’s been particularly bad. According to several of the older residents of Henley that I talked to, this was the worst they had ever seen. And the Environment Agency seems to agree – the floods this year were the highest since their records began.
Several houses in the local area had succumbed to the flood—submerged properties equal flood damage, which then equals insurance claims. You could practically hear the actuary’s calculator starting to whirr into life.
But it is not just property damage. Farming has been massively impacted, with winter crops rotting in the fields because they cannot be harvested, while sowing new crops in the drenched ground is all but impossible. This has massive knock-on effects on the economy. Less food produced locally means more imports, with all the economic and financial implications this brings.
Climate change models predict more water. Both water from the sky in the form of heavier rain (a warmer atmosphere holds more moisture, which falls as rain) and sea level increases as the ice caps melt.
It is impossible to tell how much of the current floods in the UK are due to climate change, but what we see correlates well with climate change prediction models.
What is happening is only a taster of what could happen, and if the models are correct, then the financial impacts globally could be devastating.
The Network of Central Banks and Supervisors for Greening the Financial System (NGFS) has been created to prepare the global financial system to respond appropriately.
Let me repeat this. The world’s central banks, not some activists or climate change NGOs, have set up an organisation to get us ready for the impact of climate change.
If that does not make you stop and think, then I am not sure what will.
The NGFS has several concerns, chiefly centred around the environmental risks impacting the financial system. These include:
- Climate-related financial risks: The risks posed by climate change to global financial stability. These are typically categorised into:
- Physical: Arising from climate and weather-related events like floods, droughts, and storms, causing direct and indirect losses to assets and investments.
- Transition: Associated with the shift towards a low-carbon economy. These risks stem from policy changes, technology, and consumer preferences, potentially resulting in stranded assets in carbon-intensive sectors.
- Data gaps and methodologies: A significant concern is the need for consistent, reliable, and comprehensive data on climate risks and green assets. This makes accurately assessing and managing climate-related risks challenging. The NGFS emphasises the need for improved data and methodologies for risk assessment.
Data is a big issue that several start-ups want to address. One of these is London-based Climate X.
In the act of some accidental foresight, just before the floods happened, I spoke with Lukky Ahmed, its co-founder and CEO.
With over a decade of international banking experience with leading institutions, including HSBC, Lukky’s background in risk management, regulatory change, stress testing, and consultancy was the perfect mix of expertise and knowledge to realise that the data gap highlighted by the NGFS needed plugging.
According to Lukky, Climate X stands at the forefront of the fight against climate risks. Its platform and APIs provide governments and businesses the tools to analyse and model climate change-related risks. By delivering location-specific risk ratings and loss estimates for extreme weather events linked to climate change, Climate X addresses a critical gap in risk management strategies.
Climate X has created a digital “twin” of the Earth, mapping the probability and severity of extreme weather events decades before they happen.
Its tool, Spectra, provides detailed, location-specific risk ratings and loss estimates for extreme weather events linked to climate change, including flooding, subsidence, and landslides. It includes features for climate stress testing and scenario analysis, allowing organisations to simulate extreme weather events under various climate scenarios.
Additionally, it translates climate change risks into financial risks at the asset, portfolio, or organisational level. This feature particularly benefits sectors like banking, real estate, insurance, and governmental institutions, helping them in climate adaptation and resilience planning.
According to Lukky, several factors are driving the adoption of such solutions:
- Regulatory and legislative pressures: With global regulations and legislation mandating companies to assess and disclose climate-related risks, the demand for services like those offered by Climate X has skyrocketed.
- Financial implications of climate change: The significant financial costs associated with climate change, potentially amounting to trillions, underscore the importance of tools to help with mitigating economic impacts.
- Social consciousness: The increasing social consciousness among investors, employees, and the public has catalysed the adoption of responsible business practices that consider climate impact.
For Lukky, the ultimate success of Climate X lies in its contribution towards building resilience to climate change across the global economy. He envisions Climate X playing a pivotal role in delivering data that influences global policies towards a more sustainable world, thereby minimising human suffering due to climate-related risks.
The floods in Henley-on-Thames and elsewhere in the UK are a stark reminder of the urgent need to address climate change and its potential to upend economies globally. With initiatives like the NGFS and companies like Climate X stepping up, there is hope for a coordinated response that mitigates these risks and paves the way for a sustainable future.
About the author
He is a passionate customer advocate and champion and a successful entrepreneur.