(In photo: Ian Gardner of KPMG in Bermuda)
by Annabel Cooper
As Bermuda positions itself to be a global climate risk capital, we ask KPMG’s Ian Gardner and Arnaud van Dijk, what climate risk means to Bermuda’s businesses, what regulatory standards companies should adhere to, and what they should do to mitigate and prepare.
How do you define climate risk?
Climate risk stems from a lack of adaptation to climate change and the transition to a low carbon economy, which could bring climate-related regulatory, strategic, reputational and market risks. Physical climate change arises, for example, from rising sea levels and increasing frequency and severity of weather events such as hurricanes, flooding and wildfires. In assessing their risks, companies should focus on how they are contributing to climate change and how their business strategy will fare under different climate scenarios.
Which industry sectors are most at risk?
All industry sectors will be impacted by the above risks in some form and to various extents. It is therefore fundamental for all businesses to undertake an assessment of climate risks that may impact their financial performance, business model and value chain.
What role can Bermuda’s reinsurers play in the mitigation of these risks?
The wealth of data and actuarial expertise within Bermuda’s reinsurers allows them to contribute to stress testing and scenario analysis for the global insurance sector. Reinsurers could also have a wider role in developing more holistic solutions, including working with governments and communities on programmes that provide support for extreme weather events; as mechanisms for society to ‘insure the uninsurable’ in relation to extreme weather; helping direct insurers develop risk mitigation approaches for insureds instead of expanding insurance coverage; enhancing transparency on the underlying climate risks to aid market understanding and awareness; and finally, driving investment strategies towards a greener economy.
In addition to adapting risk models, what other challenges do reinsurers face?
The challenges they face include:
• Developing a climate risk assessment that appropriately and accurately assesses short-, medium- and long-term implications. Whilst the risks are evident, the timeline for any impact is hard to specify and quantify.
• Obtaining reliable data upon which to model the impact and develop appropriate stress testing and scenario analyses.
• Ensuring underwriting strategy appropriately adjusts to climate risks ahead of the curve; ensuring appropriate knowledge and skills exist; and ensuring appropriate governance and accountabilities happen in relation to climate change risks, throughout company leadership. Overall, reinsurers need to develop an appropriate, sustainable risk management framework to continually assess and refine climate change risk assessments and mitigation and ensure such frameworks integrate to strategy-setting processes.
What sustainability disclosure standards are Bermuda-based companies subject to?
As the financial implications of sustainability become more evident, investors and regulators are putting increasing pressure on report-issuers to disclose ESG (environmental, social and governance) factors.
Various guidelines, standards and taxonomies have been established to assess the impact of ESG factors on financial performance, and the sustainability impacts of economic activities. These include the widely adopted sustainability reporting standards by Global Reporting Initiative, standards from the Sustainability Accounting Standards Board, the EU Green Taxonomy, and recommendations by the Taskforce on Climate-related Financial Disclosures.
A recent development is the formation of the International Sustainability Standards Board by the IFRS Foundation. This will help drive convergence of various frameworks and standards. The ISSB will aim to develop sustainability disclosure standards focused on enterprise value, and their Technical Readiness Working Group have already put forward a climate-related disclosures prototype.
How can Bermuda-based companies prepare for these standards?
A first step would be to become familiar with ESG-related regulatory trends and developments, especially from leading jurisdictions like the EU. Companies will also greatly benefit from an assessment of ESG factors and the development of a strategy to address these.
Boards need to be climate competent and ensure they understand how climate relates to their fiduciary duty. Do they have the right skills in the audit committee, for example? The impact of climate-related risks on financial statements are broad, potentially complex and depend on industry specific risks.
How important is it for a business to adopt ESG best practices?
Sustainability is about understanding what is important for your stakeholders. There is significant and widespread demand on transparency of what companies are doing – across all fronts – investors, employees, right through to the end consumer.
What are the key societal impacts of your activities and how will your organisation be affected by ESG topics such as climate change? An ESG approach enables a company to become resilient. According to the 2021 KPMG CEO Outlook, 52 per cent of CEOs at high-growth organisations believe their ESG programmes improve financial performance.
Ian Gardner is Director, KPMG in Bermuda and Arnaud van Dijk is Director, KPMG IMPACT, KPMG in the Cayman Islands.