Harrowing details continue to emerge of the devastating tornado that took so many lives on Monday in Moore, Okla. As just one more in a series of increasingly damaging natural disasters, people have begun to ask the inevitable question of whether climate change is to blame. Let's be clear: No single weather event can be linked directly to climate change. Period.
Having said that, I'll borrow a great analogy from Joe Casola, staff scientist and program director for science and impacts at the Center for Climate and Energy Solutions. He explained that climate change is to weather events what steroids are to home runs. We cannot say that Barry Bonds hit his 39th home run because he was on steroids, but we can attribute his general increase in homers to the fact that he was doping.
And so goes the climate. Moore's tornado may or may not have had anything to do with global warming, but there is clear evidence that the frequency and intensity of extreme weather events is on the rise because of human-caused climate change. The science really is settled on this point, folks.
Actuarial cost
The year 2011 set grim records for losses attributable to natural catastrophes, according to "Physical Risks from Climate Change: A guide for companies and investors on disclosure and management of climate impacts." The report, published by Calvert Investments, Oxfam America, and Ceres, finds that extreme weather events accounted for "90 percent of 2011 disasters and eight of the 10 most costly, resulting in overall losses of more than $148 billion and insured losses of more than $55 billion."
But don't just take their word for it. On May 15, United Nations Secretary-General Ban Ki-moon said:
We have carried out a thorough review of disaster losses at national level and it is clear that direct losses from floods, earthquakes and drought have been under-estimated by at least 50%. So far this century, direct losses from disasters are in the range of $2.5 trillion. Economic losses from disasters are out of control and can only be reduced in partnership with the private sector which is responsible for 70% to 85% of all investment worldwide in new buildings, industry and small to medium sized enterprises. The principles of disaster risk reduction must be taught at business schools and become part of the investor's mind-set.
New normal
"We're in a new normal," said Dr. Rachel Cleetus, climate economist with the Union of Concerned Scientists, at The Motley Fool's recent Climate Change Summit. "We need to take climate change as a base condition. The canary in the coal mine is the insurance industry." Indeed, European reinsurers such as Swiss Re and Munich Re have seen the writing on the wall and have been making serious strides toward addressing climate change risk.
"Insurance is heavily dependent on scientific thought," Frank Nutter, president of the Reinsurance Association of America, told The New York Times recently. "It is not as amenable to politicized scientific thought."
Not convinced? Consider some actual examples, courtesy of the Physical Risks from Climate Change report.
- Texas' record-setting 2011 heat wave created unprecedented electricity demand leading to price spikes, forcing Constellation Energy -- now part of Exelon (EXC 3.27%) -- to purchase incremental power in the real-time market at peak prices. The company suffered after-tax losses on third-quarter earnings of about $0.16 per share.
- Drought reduced Southern's (SO 2.95%) 2008 hydroelectric power generation by roughly 50%, forcing the company to meet demand from other generating sources at a replacement cost of about $200 million.
- Under Armour (UA 4.34%) experienced elevated retail inventory levels in the 2011-2012 winter due to "the impact of unseasonably warm weather," cutting into growth by as much as 2 percentage points. This was part of the reason the company had expected 2012 net revenues to come in at the low end of its long-term-growth target.
- Droughts in Bunge's (BG 3.22%) main growing areas in Brazil drove a Q4 2010 loss of $56 million in the company's sugar and bioenergy segments.
Meanwhile, General Electric (GE 1.78%) is participating in a major risk assessment exercise with PricewaterhouseCoopers and the United Nations Office for Disaster Risk Reduction. The company was selected, along with 13 other companies, because of its influence on the global economy and exposure to climate change effects. The result is a landmark risk reduction report that should be the bible of all companies doing business on this warming orb.
Lest it sound all doomy and gloomy, there is plenty of investment opportunity out there in climate change solutions providers. But failure to consider risk would be a monumental error, and the stakes just keep getting higher.
The devastation in Moore is heartbreaking. Whether it be a direct result of climate change or not, the fact is that we have the tools at our disposal to mitigate the risk of more such tragedies, and private industry will play a tremendous role in that endeavor. We can and should invest in a brighter future for us all.
