The World Bank's former chief economist, Nicholas Stern, recently conducted a sweeping analysis of the economic risks of global climate change. His conclusion: Climate change is "the greatest market failure the world has seen" and, if unchecked, it could cause "economic upheaval on the scale of the 1930s Depression" at a greater cost than both world wars combined. British Prime Minister Tony Blair declared Stern's report the most important document ever put before his government.
The Midwest will be examining its own special risks from climate change Thursday at a meeting of Midwest investors and business leaders at the University of Chicago Business School. The gathering is a cogent reminder that climate change is not just a coastal issue, but also a heartland issue, with potentially far-reaching consequences for the regional economy. So serious is the issue that 50 leading U.S. investors, including the Illinois State Board of Investment, have joined the $3.7 trillion Investor Network on Climate Risk to examine the financial implications of climate change and actions to reduce risks.
The Midwest is home to a large concentration of industries particularly vulnerable to climate change: agriculture, automotive, power generation and insurance. Conversely, these industries are well-positioned to develop products and technologies that can minimize the environmental effects of climate change while also improving their bottom line.
The effects of climate change in the region are already being felt. There is a growing body of evidence that the region's winters are getting shorter, annual average temperatures are getting warmer, and extreme heat and heavy precipitation events, such as damaging hail storms, more common. Studies suggest that unless the pace of change is slowed, annual average temperatures in the region could increase by 5 to 12 degrees Fahrenheit in winter and an astonishing 5 to 20 degrees in summer by century's end.
The effects of climate change on agriculture could be profound. According to a 2005 report by the Union of Concerned Scientists and the Ecological Society of America, severe flooding and extreme weather could significantly reduce crop yields. While no one event can prove climate change, Nebraska and other Midwest states have in recent years suffered through their worst drought since the Dust Bowl. Scientists say these kinds of events could eventually become the norm as global temperatures rise.
One of the financial risks of climate change relates to regulations designed to address global warming. California and seven Northeast states have already mandated reductions in greenhouse gas emissions, and other states and the federal government are likely to follow. The automotive and energy sectors will either have to prepare for regulatory changes or face financial peril. Indeed, carmakers and power providers that look around the curve and begin implementing strategies to reduce emissions and operate with greater energy efficiency will have a significant competitive edge over those that do not. Similarly, those that exploit alternative energies such as bio-based fuels will reap the financial benefits of their foresight -- and, in fact, already are doing so.
For the insurance sector, climate change is a particularly critical issue. That's why the National Association of Insurance Commissioners, the key regulatory body that oversees the insurance industry for the public's protection, has formed a task force on climate change.
Extreme weather related to climate change exposes property insurers to enormous financial risks. One single event, Hurricane Katrina, resulted in a staggering $45 billion of insured losses. The ripple effects of Katrina are still being felt. Many private insurers are no longer willing to take risks in areas prone to extreme weather. In the last year alone, 600,000 homeowner's policies in Florida and Louisiana have been cancelled, forcing under-funded state-run insurance pools to pick up the slack, a burden borne by taxpayers.
How firms manage the risks and opportunities of climate change will affect their future competitiveness and, in some cases, their survival. Good corporate governance demands company directors and CEOs make climate change risk a top priority.
In the insurance sector, for example, some industry leaders are already adapting with financial incentives for commercial building owners that re-build using energy efficient "green" building practices or engineering improvements that reduce storm vulnerability. Other insurers are offering premium discounts for drivers of lower-polluting hybrid vehicles.
Climate change is one of the great challenges of this 21st century. Rising to that challenge is essential if executives and corporate boards -- in this region and beyond -- are to meet their fiduciary duties to the companies they serve and their larger responsibilities to the public at large.
Tim Wagner is director of the Nebraska Department of Insurance and co-chair of the Climate Change Executive Task Force of the National Association of Insurance Commissioners. Mindy Lubber is president of Ceres, a coalition of investors and environmental groups working with companies to address the business challenges posed by climate change.