Climate change and its economic impact. The tools available to industry and business
Numerous studies have demonstrated how the average temperature of our planet has been rising rapidly for the last 150 years, since the start of the industrial age. We now have reasonable certainty that this increase is caused by human activity, particularly by the emission of CO2 from the burning of fossil fuels (IPCC, 2014). Some of the clearest and most striking evidence of the rise in temperatures can be seen in the alpine glaciers. Comparing the earliest photographs of the glaciers, taken around 1850, with the current situation provides an extraordinarily clear picture of what has changed since then: the glaciers’ expanse and thickness has reduced and some are disappearing, or are set to vanish within the next few years.
Another consequence of global warming is the rise in the frequency of extreme weather events. As the planet’s temperature rises, the energy available in the atmosphere to power meteorological systems also increases. Autumn storms, for instance, are fed mostly by evaporation from the sea’s surface. If the evaporation intensifies, then more “fuel” becomes available for our storms. The same mechanism can be observed in the case of tropical hurricanes, the strength and severity of which seems to be increasing. The climate is becoming ever more extreme in all of its facets: from heat waves to droughts in tropical areas, such phenomena are becoming more and more frequent.
Climate change is now part of our lives and while some still deny it, 2018 confirmed what the scientific world has been saying for years: extreme events are becoming more and more evident and frequent. This phenomenon involves everyone, especially companies. However, according to a study by the international organisation DNV GL (one of the world’s leading quality assurance and environmental risk management companies), in collaboration with the market research institute GfK, these companies are still unprepared to face the risk of global climate change. 40% of Italian companies, in fact, admit that the climate has an effect on at least one of their main areas of business, but there are still very few that have taken action.
The Enel Group has been working for some time, through some important partnerships with academic and meteorological institutions, on perfecting some advanced meteorological instruments to provide climate predictions that can offer potential benefits for business and industry. The importance of the studies conducted and the initial results has been acknowledged by the awarding of European Commission funds as part of the Horizon 2020 programme. This project aims to improve the interaction between industry and research, in order to refine our forecasting abilities for atmospheric phenomena and to help the companies affected to manage their consequences.
So, how can we help companies defend themselves from sudden and at times devastating weather events? It is essential for a company to understand its own exposure to climate risks, i.e. the impact of climate variability on its margins, both in the long and short term.
Beginning approximately two years ago, the Enel Group started to assess the consequences of climate change and to connect these to specific business issues. In particular, we have been developing and introducing tools to help us understand how increasing variability in climate phenomena impacts our ability to effectively manage our production of electrical energy as well as the economic results associated with this.
Over time we have become increasingly knowledgeable about the financial risk management tools necessary to limit the impact of the growing unpredictability of atmospheric events on company profitability – the so-called “weather derivatives.” Given that now we can no longer ignore the existence of climate related phenomena, we must try to control their impact on business results by using tools capable of examining the energy sector and climate risk together.
* Authors:
Claudio Baldini, Head of Middle Office & Risk Management Italy
Alessandro Delle Fratte, Responsible of the Market Strategy Italy
Marco Formenton, Meteorologist