A systemic disconnect between material natural disaster risk, asset valuation and infrastructure investment demands that disaster risk and resilience be integrated into broader financial, accounting and reporting systems, David Greenall, senior director of sustainable business solutions for PwC Canada, told Canadian Underwriter Friday, the International Day for Disaster Reduction.
“The inadequate pricing of disaster risk and of broader externalities in economic activity means that climate and seismic-related disaster risk is discounted excessively in order to maximize short-term gains,” notes Greenall, national focal point for ARISE Canada.
Inadequate risk pricing “results in hydro-meteorological and seismic risks being inadequately considered in the pre-investment and investment stages of projects – for example, continued building in floodplains or along vulnerable coastlines – as capital owners are not incentivized to avoid excess natural disaster risk,” Greenall points out.
“Disaster risk, thus, becomes ‘locked in’ in the form of built infrastructure and long-lived capital assets. In the case of climate change, this locking of risk limits/impairs our collective long-run ability to adapt to a changing climate,” he explains.
Greenall views integration of disaster risk and resilience into broader systems as one of three top priorities for bolstering Canada’s and reducing severe weather damage.
That integration can be realized by “standardizing such disaster risk metrics and mobilizing financial markets, accounting and regulatory bodies to adopt them,” Greenall notes.
The other main priorities on his two three list for enhancing Canada’s resilience by stimulating and rewarding natural disaster risk-sensitive investments include the following:
embedding a price on climate and other natural disaster risk early in the investment cycle to facilitate the rational allocation of risk-sensitive capital; and
increasing the availability of investment metrics and identifying new and existing public, private and mutual mechanisms for measuring and accounting for disaster risk in investments.
The steps currently being taken “to prevent, prepare for and respond to natural disasters are hampered by a generally fragmented approach, in which communities, businesses and public authorities take too little account of the threat from natural disasters in their investment and planning decisions,” Greenall argues.
Beyond focusing on being ready for disaster events, he told Canadian Underwriter, is the need to “have a sophisticated, science-based understanding of their inherent risk.”
By under-appreciating natural disaster-related risk, Greenall suggests, mispricing of risk occurs:
investors do not factor disaster risk into their valuations;
creditors do not systematically assess natural hazards against their loan books;
real estate markets largely ignore extreme event risk, even in highly exposed locations; and
governments invest in public infrastructure that, in the long run, may be unable to achieve public policy goals.
“Urban development within known floodplains, or building major transportation infrastructures to a design standard that does not account for future climate are prime examples” of unsound investment decisions that continue to be approved, he says.
“As a society, we need to move – rapidly – to a state where natural disaster resilience is valued – a state where investment in a resilience intervention acts as a credit against the contingent disaster risk liability associated with impairment to the performance, valuations or liquidity of physical and non-physical assets,” Greenall maintains.
“Leading companies such as IBM, GlaxoSmithKline, AXA, Walmart, and UPS representing different sectors and global value chains are starting to explore how best to adapt and apply natural disaster risk assessment data, metrics and tools in order to assess their own risk resilience,” notes information from PwC Canada.
“Modelling platforms, information supply chains and ecosystems and advanced analytics are rapidly emerging and becoming much more precise and granular, thus enabling complex, big data analysis of disaster risk in relation to large infrastructure capital allocation decision-making, as well as capital adequacy and solvency requirements of major financial institutions,” Greenall reports.
Global expected annual losses from natural disasters are now estimated at US$314 billion in the built environment alone, PwC Canada reports. “These rising losses put a severe strain on public finances and, in many countries, act as a brake on economic and social development,” the information notes.
Capacities for risk assessment and identification, disaster preparedness, response and early warning have been enhanced in Canada over the last decade, PwC Canada points out.
Still, “the prospect of structural and comprehensive improvements in disaster risk reduction and climate resilience across the public and private sectors currently remains a distant goal. Progress is most importantly needed in managing the underlying drivers of disaster risk,” the statement contends.
“There is a critical need for organizations and actors to work together to build ‘shared societal resilience,’” Greenall emphasizes. “From an insurance standpoint, the industry clearly has the expertise and commercial interest to support ways to improve the understanding, prevention and mitigation of disaster risk,” he says.
ARISE aims to improve awareness of disaster risks within governments and the business community. The alliance focuses on ways that businesses and public authorities can become more informed about the threats and build them into their business plans, enterprise risk management frameworks, business continuity and emergency response plans, and operational management.