Environmental Risks – Earth Is On A Steep Slope And Financial Services Will Not Offer Ultimate AnswersCategorised in: BLOG
Over the years, environmental risks have continued to rise to priority across the world. Without downplaying the relevance of economic challenges, their urgency has continued to be dulled by the huge probable impact that the world faces from environmental destruction and the likelihood that ecological risks can manifest more regularly today than in earlier years gone by.
The World Economic Forum performs regular risk reviews for the world and offers insightful analyses of the exposures humanity faces, over a wide scope of issues. Our planet faces societal, technological, economic, environmental as well as geopolitical issues. Ten years ago economic challenges were the leading problems for the world. They related to oil price shock, asset price collapse and the China economic hard landing. By 2017, the world’s risk profile has changed so significantly that economic problems have been replaced by exposures to extreme weather events, major natural disasters as well as the failure of climate change mitigation and adaptation.
These environmental issues can mete very heavy consequences for earth’s inhabitants and the probability that we can experience events related to them is not as remote anymore. Indeed, according to the World Economic Forum, no environmental issue was highlighted in the top five risk exposures to the world by 2007 whereas in 2017, three of the same top five issues are environment related – going by the potential impact that the said risk events can deliver to the world.
To bring environmental risks close to home, think about the example of climate changes.
Experts relate these changes to unfavorable variations in seasons, occurrence of new diseases and pests, frequent occurrence of floods and change in overall weather scenario. The effect of these on agriculture and general human welfare needs not be elaborated. Extreme weather events will continue to intensify if climate change mitigation, which currently is part of world leadership focus, does not take off. Climate change adaptation on the other hand will continue to demand resources in ever increasing proportions.
Without delving into the science of ecological risks and their impact on humanity, it should be noted that there will be expectations of financial institutions to be part of the solution for relevant emerging risks and therefore banks and insurers as well as other financial institutions should start evaluating their contribution to the solutions matrix today and the implications on their future business.
For illustration, consider a bank in the process of making agricultural lending decisions.
The uncertainties occasioned by environmental risks such as likely floods and droughts or even pest attacks make potential borrowers to be flagged with high risk and therefore turnout unattractive. Such borrowers’ entire harvest could be wiped out rendering them totally unable to meet their loan repayment obligations. Were the risks to be covered by taking insurance policies, the likely claims on such policies could be unbearable for insurers if extreme weather events set in. That is not even as far as going to the level of devastation that major natural disasters can inflict, especially if they become more frequent and widespread across the globe.
They would likely even threaten the comfort of global reinsurers to participate in the risks involved, regardless of whether there was growing permissiveness to embrace traditionally avoided risks even if higher insurance premiums can be paid.
As such, offering financial services to solve risks related to environmental destruction is not sustainable in a world scenario where environmental risks are escalating.
There will be no ultimate financial solutions to food shortage crises and no answers from bankers and insurers to water supply crises. New diseases will continue to plague earth. Pests will wipe out crops in millions of hectares and diseases will destroy farm animals in droves as bankers and insurers distance their balance sheets from these calamities.
For societies that are highly dependent on agriculture, the consequences will be deep. For those whose livelihood comes from other productive employment, the concern will not be any less. They depend on farming communities for food.
In Sub-Saharan Africa, where populations are growing exponentially and levels of scientific intervention to correct nature conservation problems so low, we are already way behind time as far as arresting growing ecological distortions is concerned. We must implement preventive measures to contain the growing exposure to environmental damage. Without proper prevention of environmental risks, sustainability of nations is in high doubt. This will remain so even if financial institutions innovate to meet the related and changing client needs.