The devastation caused by hurricanes Helene and Milton forces us to confront, once again, the growing threats posed by extreme weather events. While our concerns first and foremost are with the communities reeling with the aftermath of powerful storms, the financial community must also consider the adverse financial implications resulting from the increasing frequency of severe weather.
Why Are Storms Becoming More Costly?
While every disaster carries its own unique tragedy, it is hard to ignore the broader context in which these storms are occurring. To be clear, climate change is not the only reason for the rising human and economic costs of extreme weather. People continue to move into vulnerable areas, increasing the potential risks and costs. But for years, scientists have sounded the alarm about the link between our fossil fuel-based economy and the increasing severity of extreme weather events.
Too often, the physical destruction caused by heatwaves, hurricanes, floods, and wildfires are viewed as “normal costs” – either seen as part of natural cycles, covered by insurance, or not material enough to fully integrate into decision-making processes. However, this perspective is increasingly untenable. The reality is that physical climate risks are poised to increase in a warming world. As these physical risks materialize, costs will rise – whether though higher insurance premiums or the costs to society as certain risks become uninsurable.
Waiting for a Catastrophe
Some observers believe that only a catastrophic event – or series of events – far beyond Helene or Milton will drive society to demand the policy and behavioral changes necessary to transition to a low-carbon economy. Yet, the hope that such events will spur action seems misplaced, as policy makers have largely failed to take the action necessary that would chart a course to limit global warming to 2 degrees above pre-industrial levels (let alone 1.5 degrees).
“Integrating climate risks into investment decisions is no longer optional—it’s financially prudent as we face a warming world.”
We are of the increasing belief that the energy transition will be galvanized by demand-side forces, making clean technologies cheaper, better and faster than their fossil fuel counterparts. Governments have started to support the transition by derisking private capital investment through incentives and tax credits, as seen in the Inflation Reduction Act. Such policy actions will only serve to bring the inevitable transition risks forward more quickly.
Future-Proofing Portfolios
Integrating the physical and transition risks brought on by climate change into models and investment decisions is financially prudent, regardless of one’s view of ESG investing or the desire to impact climate outcomes. Investors with the foresight to act now can future-proof their portfolios from the financial risks that will almost assuredly arise from climate change.
Chris Ito
CEO
FFI Holdings