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Climate Risk and Stewardship Summit Summary

Climate and Resilience Hub|Climate Risk and Resilience

May 21, 2021

Willis Towers Watson’s inaugural Climate Risk and Stewardship Summit explored the rapidly evolving landscape of climate-related risk and the role of stewardship in a transition to a Net Zero and resilient economy.

The three-day programme, attended by over 3400 participants across all sessions, opened with a hard-hitting presentation on the consequences of missing the 1.5C limit of global warming agreed at Paris in 2015. Dr Emily Shuckburgh, Director of Cambridge Zero at the University of Cambridge: “The Anthropocene is traditionally thought of as being the era in which humans have been acting in conflict with our planet. But there’s also the opportunity to redefine the Anthropocene as the era in which humans act in support of the planet.”

John Haley, CEO of Willis Towers Watson: “Our fervent belief is that organisations that respond to the climate challenge effectively will benefit from enhanced continuity and financial stability, more resilient investment, brand and reputation advantages, and greater potential to explore unfolding opportunities. Clearly, addressing climate change is a collective action problem, and a collective responsibility – we all have a role to play. We are the ‘they’ who have to act.”

Action is the critical word over the Climate Decade ahead and the programme that followed shone a light on some of the climate solutions and emerging tools of the transition, while drawing on real-world experiences from the journey to a low carbon and climate resilient world.

Day 1 explored the role of stewardship in the financial sector, the duty of ownership for asset owners and the importance of culture in driving climate-aware decisions.

Roger Urwin, Global Head of Investment Content from the Thinking Ahead Institute: “While this ask is huge, mindsets are shifting faster than I have ever seen in my career. The slow moving but unstoppable ESG train is now rapidly picking up pace and has become turbo charged.”

Investment decisions can either be good or bad for the planet, irrespective of whether they are good for the balance sheet. Matt Scott, Senior Director within Willis Towers Watsons’s Climate & Resilience Hub (CRH), said that banks, insurers, investors and companies must play a strategic role in de-risking the system.

Matt Huxham, Sovereign Risk Programme Director (CRH), provided an example of how this principle might be applied in the real economy: “When companies or financial institutions act strategically to mitigate transition risk – perhaps by divesting fossil fuel assets – this may help the seller in getting closer to its net zero target, but it doesn’t mean the risk disappears and it may even make things worse, depending on who the buyer is.”

Net Zero targets don’t happen on their own, they are the result of the decisions made by people in those organisations. But the culture needs to support that decision making.”

Marisa Hall
Co-Head of the Thinking Ahead Institute

Net Zero targets don’t happen on their own, they are the result of the decisions made by people in those organisations. But the culture needs to support that decision making. Marisa Hall, Co-Head of the Thinking Ahead Institute, said: “Culture is the best competitive edge your company can have – strategy is important, but culture is invaluable. Truly sustainable firms – ones that are truly collaborative, do 3D investing, conduct innovative research, and are culturally effective – are critical for our world’s future.”

Alastair Wood, Senior Director, Talent and Rewards: “An organisation might have a great climate strategy, but people are the advocates and enablers of climate strategy. It needs to be clear and well-articulated, and employees need to understand it and be actively engaged. Listening, incentives, skills and inspiration – these will be the people pillars of creating a strong climate-positive culture and engage employees in their journey towards Net Zero and climate resilience.

Day 2 looked at current ways to measure climate risk and experiences from the field in managing them, before looking ahead to what emerging methods and models will assist in future.

David Nelson, Senior Director of Climate Transition Analytics within the CRH said: “Having a high or low carbon intensity is a poor indication of whether you have financial risks associated with the transition. You could have a coal-fired power plant under a regulated regime where all of the [costs] or transition risks were passed onto consumers. At the same time, you could have a technical services company without any indication of climate risk as measured through carbon intensity, but whose customers were all in oil and gas industries.”

The team within CRH is currently looking at ways to integrate both physical and transition risk to provide a more holistic view of overall climate risk. Richenda Connell, Senior Director of CRH’s Physical Risk Programme with financial institutions: “Transition and physical risks are inter-related, and for financial institutions to really understand what climate risk means, they need solutions which consider the dynamic nature of these interconnections.”

For financial institutions to really understand what climate risk means, they need solutions which consider the dynamic nature of these interconnections.”

Richenda Connell
Senior Director of CRH’s Physical Risk Programme

Dr Nicola Ranger, Deputy Director of the UK Centre for Greening Finance and Investment and Head of Climate and Environmental Risk Research, Oxford Sustainable Finance Programme, said that if you’re a financial institution, it is those really big shocks that you need to think about. For example, the global food price spike of 2007-2008, caused by drought, increased oil prices and growing demand for biofuels, triggered further instability in developing countries.

Matthew Jones, Head of Catastrophe Risk at Nasdaq, pointed out the depth of expertise in the insurance sector that can help quantify and manage physical risk, but these tools needed to be applied appropriately: “Most natural catastrophe models focus on the peril risk today, but new models are starting to emerge to quantify the future climate risk. If built and used properly, they are useful and valid tools beyond insurers and reinsurers.”

“We need portfolios that will help drive a Net Zero world, rather than Net Zero portfolios – they are two very different things,” said Deidre Cooper, Co-Head of Thematic Equity at Ninety One.

Day 3 explored climate risk and stewardship for pension schemes and the evolving climate risk regulatory landscape for insurers and reinsurers.

Climate risk is financially material for most pension schemes and engagement is “utterly vital” said Guy Opperman, Minister for Pensions and Financial Inclusion: “Pension fund trustees can be passionate about returns for investors at the same time as being passionate about climate and ensuring we have a planet post-2050. They can get a good return and be part of the solutions.”

Alasdair Macdonald, Head of Advisory Portfolio Management, Willis Towers Watson: “Realistically, the target is almost always Net Zero, so the only variable is the timescale. The backstop for most clients will be Net Zero by 2050 in line with government targets. However, in line with our pledge we’d aspire to a goldilocks approach relative to this default. Not so fast that there is a risk of financial detriment, but equally not so slow that we’re failing to pick up on first mover advantage.”

David Fairs, Executive Director for Regulatory Policy, Analysis and Advice, The Pensions Regulator: “On the horizon, we’ve got about 100 schemes lined up to do TCFD disclosures. For schemes that are starting on that journey, TCFD disclosures are going to help them understand the baseline of their carbon journey plans.”

He added that the Financial Conduct Authority would also be going out to consultation on imposing financial disclosures on investment managers in the coming weeks. Data quality was a recurring theme throughout the Summit. David Fairs: “The cascade of information is not going to be perfect in those early years. For those in that first wave of disclosure, it’s going to be a bumpy journey as the data improves. By 2023, we’ll have made substantial progress.”

The steady, continuous approach to developing a climate change regulatory framework greatly improves the likelihood of eventual success.”

James Vickers
Managing Director, Willis Re

James Vickers, Managing Director, Willis Re, acknowledged the efforts of UK regulators: “We are fortunate that we have regulators overseeing our activities and…developing practical regulatory frameworks to help us distil the myriad challenges that climate change represents. It’s not easy for many private companies to distil that into practical action. The steady, continuous approach to developing a climate change regulatory framework greatly improves the likelihood of eventual success.”

One outcome of that regulatory process is the Bank of England’s climate-related Biennial Exploratory Scenario (CBES), also referred to as climate stress testing, to be launched in June 2021 with results published in Q1 2022.

While relationships between regulators and industry is critical to success, the insurance sector will sometimes have to take the lead. Huw Evans, Director General, Association of British Insurers: “The scale of adaptation required over the period ahead and the amount of change that our customers are going to have to live with and in some cases fund - whether they are individuals or businesses - is absolutely huge. And we are just at the foothills of this challenge.”

Ultimately, the Climate Decade ahead will be determined by the actions that the financial services sector takes. Rowan Douglas, Head of the Climate & Resilience Hub: “Stewardship in the resilient, Net Zero transition requires whole system thinking for a whole economy transition, that can deliver returns now and into the future.”

View all the presentations and panel discussions here.

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