BusinessFinancial decision making, risk taking in the face of changing climate
Maximizing returns on financial investments depends on accurately understanding and effectively accounting for weather and climate risks, according to a new study by the American Meteorological Society. An AMS report concludes that financial investments face a range of risks due to existing weather patterns and climate variability and climate change. Even small changes in weather can impact operations in critical economic sectors. At the same time, climate variability and change can either exacerbate existing risks or cause new sources of risk to emerge.
Maximizing returns on financial investments depends on accurately understanding and effectively accounting for weather and climate risks, according to a new study by the American Meteorological Society (AMS) Policy Program.
The study also found that weather events create and exacerbate risks to financial investments by causing 1) direct physical impacts on the investments themselves; 2) degradation of critical supporting infrastructure; 3) changes in the availability of key resources; 4) changes to workforce availability or capacity; 5) changes in the customer base; 6) supply chain disruptions; 7) legal liability; 8) shifts in the regulatory environment; 9) reductions in credit ratings; and 10) additional impacts that alter competitiveness (for example, shifts in consumer preferences).
An AMS release reports that the study is based on a recent AMS Policy Program workshop, Climate Information Needs for Financial Decision Making, held in Washington, D.C. earlier this year and conducted in partnership with the University Corporation for Atmospheric Research (UCAR). Financial analysts, investors, academicians, and key leaders from the business, financial, and climate research communities convened to examine the role of climate science in financial analysis.
The purpose of the study was to assist with societal decision-making by examining the implications of climate variability and change on near-term financial investments.
To overcome communication barriers that stem from technical terms often used in scientific assessments, the AMS report proposes three pre-defined levels of certainty for communicating with user communities about future climate impacts: 1) possible; 2) probable; and 3) effectively certain. For example, the study reports that it is effectively certain that a change in climate will alter weather patterns. It is probable that climate warming will cause increases in the intensity of some extreme events. It is possible that climate change will cause major and widespread disruptions to key planetary life-support services.
The report concludes that financial investments face a range of risks due to existing weather patterns and climate variability and climate change. Even small changes in weather can impact operations in critical economic sectors. At the same time, climate variability and change can either exacerbate existing risks or cause new sources of risk to emerge.
“Near-term financial decisions have long-term implications for the United States’ social and economic well-being that depend, in part, on climate variability and change,” said Paul Higgins, director of the AMS Policy Program. “In an increasingly competitive global environment, nations that invest most effectively with respect to weather and climate risks will have an important competitive advantage.”
“It’s smart business to incorporate the latest weather and climate knowledge into financial decisions,” said Thomas Bogdan, president of the University Corporation for Atmospheric Research. “This is an important example of the business and research communities working together to strengthen financial investments and the larger U.S. economy.”
Gary Geernaert, director of DOE’s Climate and Environmental Sciences Division, states that “it is critical that federal investments to advance climate science for use by both public and private stakeholders must place significant priority on incorporating uncertainty quantification methodologies into modeling frameworks. In this way, projections would contain sufficient information for risk analysts to provide more informed recommendations to financial decision makers. The workshop was an excellent step in the right direction.”
The release notes that the American Meteorological Society’s Policy Program intends to conduct a series of follow-on activities to continue the collaboration between the financial decision-making and scientific communities established by the study and to help put the report’s recommendations into practice.
— Read more in Climate Information Needs for Financial Decision Making (American Meteorological Society, 2013)
