Come rain or shine: insurers help climate-risk disclosures
From laggard to leader
Until recently, Japan has been viewed as a laggard on environmental, social, and governance issues. But the past few years has seen the country catching up swiftly with leading sustainability practices and standards.
Over the past five years, ESG investing by Japanese institutions multiplied twelve-fold. It stands at 310 trillion yen as of December 2020, according to the Japan Sustainable Investment Forum, or 7% of the global total as of 2018.
Japanese multinationals have also taken the lead on a new set of environmental disclosure standards. Thus far, 270 companies headquartered in Japan, higher than in any other country, have endorsed the guidelines established by the Task Force on Climate-related Financial Disclosures (TCFD) which ask companies to disclose items related to climate change-related risks and opportunities. The Japanese government has kept up the momentum as well, committing last October to zero-net emissions by 2050, in line with the EU and UK.
What is driving Japan’s shift from laggard to leader on ESG?
Regulatory changes are part of the equation. Recent reforms in Japan’s Stewardship Code are pushing the country’s largest institutional investors, particularly its USD 1.5 trillion government pension fund, into integrating sustainability principles in investing and governance.
Equally significant is a heightened sense of threat. The last few years has witnessed larger, more expensive, and unexpected catastrophes across the globe. These include storms, floods, fires, and pandemics stemming in part from climate change. Japan, in particular, has been struck by a string of record-breaking typhoons: five of the worst ten events in terms of insurance claims paid out for wind and flood damage in the country’s history occurred in 2018 and 2019.
“Damage from floods in the last few years have become larger and closer in the minds of the Japanese,” says Terumi Nakamura, President of MS&AD InterRisk Research & Consulting, Inc. “Japan has been slightly behind in the past, but the pressure is now clearly on to come to grips with climate change.”
Equally significant is a heightened sense of threat. The last few years has witnessed larger, more expensive, and unexpected catastrophes across the globe. These include storms, floods, fires, and pandemics stemming in part from climate change. Japan, in particular, has been struck by a string of record-breaking typhoons: five of the worst ten events in terms of insurance claims paid out for wind and flood damage in the country’s history occurred in 2018 and 2019.
“Damage from floods in the last few years have become larger and closer in the minds of the Japanese,” says Terumi Nakamura, President of MS&AD InterRisk Research & Consulting, Inc. “Japan has been slightly behind in the past, but the pressure is now clearly on to come to grips with climate change.”
Actuaries to the rescue
Another less recognised driver for Japan’s recent awakening to ESG practices is the role of actuarial consultancies like InterRisk, which is part of the MS&AD group, a leading global non-life insurance company.
MS&AD has put climate change mitigation and adaptation as a core priority for its sustainability goals. To that end, the insurer provides insurance and services designed to reduce damage from climate change and help clients transition to a decarbonised society.
Within the group, InterRisk has been providing climate-change risk analyses to Japanese companies in the financial sector and industry. Its services help clients build a climate change governance structure, perform scenario analyses, and develop climate strategies in accordance with TCFD recommendations.
“Although many Japanese companies have endorsed TCFD, oftentimes their disclosure of climate-change risks remain qualitative and can be made more quantitative,” says Mr. Nakamura. “Our consultants can provide a comprehensive assessment of both the physical risks stemming from climate change and transition risks from decarbonisation.”
With the eye of Jupiter
To meet these needs, InterRisk launched one of the world’s most advanced quantitative climate-risk analysis services in July of last year. The service uses modeling tools provided by Jupiter Intelligence, Inc., the world’s leader in predictive data and analysis for climate risk and which recently raised capital from MS&AD Holdings.
“Our tool for predicting climate risk – the Global Climate Score – is the most comprehensive and scientifically rigorous service available,” explains Richard Sorkin, CEO of Jupiter. “It incorporates all of the world’s best climate science models to provide predictions of the impacts in terms that are relevant to its customers anywhere on the planet.”
Using Jupiter’s tools, Mr. Nakamura explains, the service can assess probabilities of river and tidal flooding, extreme heat, and high wind stemming from climate change all over the globe with 90- square-metre precision. It can also assess these risks at five-year increments from 2020 to 2100 based on four different kinds of emission scenario. Such features make the service unparalleled in granularity, scope, and predictive accuracy.
“Most companies on the planet are flying blind in terms of where they have concentrated or even if they have concentrated climate risk,” says Mr. Sorkin. “So using this tool is an excellent first step in changing management processes. And our customers are already telling us that we do a better job of predicting the current year risk.”
Driving forward TCFD
Mr. Nakamura and Mr. Sorkin concur that complying with TCFD guidelines is becoming one of the more significant drivers of demand for climate risk assessments.
“The need for such services is expected to be particularly strong from companies with assets, production, and supply chains in Asia, which has the highest exposure to flood risks stemming from climate change,” explains Mr. Nakamura.
In a report from 2020, the World Resource Institute estimated that in 2030 the amount of global GDP at risk from a once-in-a-decade flood event would be $17 trillion, with half of that value coming from losses in Asia, mainly in China and India.
Such figures are sharpening minds. The state of climate risk preparedness and awareness is a bit like cyber-risk was 10 years ago, Mr. Sorkin explains. At the time, most enterprises may not have given much thought to cyber-risk, but now “everyone is waking up to the fact that climate risk is significant and material and will require change in risk management practices.”
Come rain or shine
A better understanding of climate threats to location-specific assets is vital, but still represents only one part of dealing with a much larger overall challenge.
MS&AD Group identifies a cascade of physical and transition risks. These include changes in weather such as drought and reduced water supply; increases in the incidence of heat stroke and infectious diseases; tightening environmental regulations; increases in litigation related to environmental disasters and reinsurance premiums; to changes in the industrial structure and deterioration in investment returns due to decarbonisation.
“Only committing to decarbonisation and mitigating risks of transitioning to a zero-emission future will not be enough,” says Kousuke Terasaki, senior consultant at InterRisk. “It’s necessary to prepare to be resilient whichever way the broader economy tips. Many scenarios need to be planned for.”
Building resilience against these complex challenges appears daunting, but awareness of their interlinked nature is critical.
“We need to persuade clients that for many of them climate risk is the biggest and also the key risk which provides leverage over many other risks,” says Mr. Nakamura. “Ultimately we hope to offer and bring together risk mitigation plans under the goal of achieving sustainability, for the individual client and for the planet in general.”
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