July 10, 2006 4:00 AM PDT
Smart money eyes climate change
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Walker listed several liabilities stemming from global warming and climate change, including heat waves affecting life expectancy, droughts harming crops or pine beetles destroying lumber in British Columbia because winters are not cold enough to kill them.
In another indicator of the insurance industry addressing the issue, the National Association of Insurance Commissioners earlier this year established a task force to examine climate change and address changing climate patterns.
Insurance company Allstate has already started to act. To reduce its risk exposure, the company has started to limit insurance coverage to people who live in coastal communities from Texas to New York, because there have been more natural disasters in the past few years.
"We don't get into the reasons why we are having more storms, but we are having more storms," said Mike Siemienas, a company spokesman. "The facts and the experts show we're in a period where we will have more storms."
Seven of the 10 most expensive catastrophes for Allstate have occurred in the last two years, he added.
Experts see a host of other risks in addition to those related to natural disasters.
Like health issues related to asbestos and tobacco did in the past, climate change could lead to lawsuits. Such litigation could target companies that either contribute to global warming or did not take sufficient steps to address regulations, said Wellington. Higher energy prices can also disrupt company supply chains and product development, he added.
Even a company's brand can be affected: Carbon Trust, a U.K.-government funded company, published a report last fall saying that industries, such as airlines or even food and beverage companies, can increase their brand value with eco-conscious consumers by being "carbon responsible."
"What's happening is that carbon is becoming a commodity," said Swiss Re's Walker. "It's another risk that (businesses) have to manage."
Swiss Re is not just hedging against risk; it's also devising new products linked to climate change and greenhouse gases.
The company is about to close a clean energy investment fund and is in the process of setting an emissions-trading capacity that will allow corporations to trade in carbon and other greenhouse gases, Walker said.
It is also devising personal liability insurance for directors of companies, who could be sued by shareholders for dragging their feet on meeting carbon regulations, said Walker.
"We've been asking companies how they are managing climate and carbon exposure, and based on that feedback, that's part of our underwriting rating," he said. "This is a little bit of a warning to companies, saying this is a risk which we will take seriously."
In its June investment opportunity report, Citigroup named its "Clean Dozen," 12 North American companies poised to profit from climate technologies. The list includes Arthur Daniels Midland for its biofuels development and Kinder Morgan for its carbon dioxide transportation.
Citigroup's report noted that there is a significant amount of regulatory activity worldwide to reduce greenhouse gas emissions, which will serve as a "catalyst" to investment.
"Markets are inherently forward looking," said Wellington. "The debate has shifted from whether or not climate policies will hit us but rather when and in what form. And markets are trying to grapple with the second half of that question."
MIT's Moniz agreed that it's mainly a question of when and how federal emissions regulations in the U.S. will take hold. A European Union system for trading greenhouse gas emissions, called the Emission Trading Scheme, or ETS, was launched in January 2005.
Moniz said "virtually all companies" are factoring carbon into their planning, despite differences on how the issue should be approached. Exxon, for example, has resisted regulations, while BP endorses development of government policies, Moniz noted.
"Industry, generally speaking, says: 'Hey if you give me rules, I'll compete,'" said Moniz. "It's uncertainty that drives them nuts."
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