Reform to the financial system could create the conditions to save millions of lives, livelihoods and property in the decades ahead.
Scenes of intense flooding as Typhoon Soudelor hit Taiwan, China and the Mariana Islands this August emphasised the heavy losses caused by extreme weather events.
Typhoons this year accounted for an estimated 35 billion yuan (US$5.47 billion) in economic damages and affected 255 million people in China alone.
For smaller island nations such as Vanuatu the picture is even more bleak – estimated annual losses are projected to reach 6% of GDP by 2100.
Despite these staggering statistics, at present the global financial system does not take adequate account of the risks posed by extreme weather.
For instance, if two otherwise identical companies have different exposures to extreme events, with implications for their potential solvency or profit, the company with the greater exposure should have a reduced value or share price and be less desirable to investors.
Surprisingly, this is rarely the case.
As we highlighted in our ‘Resilience to extreme weather’ report, while the insurance sector has made considerable progress when it comes to assessing and disclosing risk, the financial system as a whole still has some way to go before extreme weather risk is incorporated into financial reporting.
In spite of this, there have been some welcome signs over the past year. The ‘1-in-100 Initiative’ aims to introduce annual stress tests for the solvency of organisations in extreme event scenarios – a measure that we recommended in our ‘Resilience to extreme weather’ report.
In addition, in Addis Ababa last month, UN member states met to discuss ways of financing international development – though media attention focused on the failure to agree on global tax policy, improving access to risk insurance was a feature of the action agenda agreed by Addis participants.
This process is set to continue, in the next week, the issue will be on the agenda at a major conference on disaster risk reduction in Australia.
Disaster risk should be integrated into the global finance system and systematically reported, as legal or economic uncertainties currently are.
As we state in our report, “without financial reform, people’s resilience will be undermined in the future.”
If this shift doesn’t take place, the typhoons yet to come may cause still more hardship.
For more on this, see chapter four of our Resilience to extreme weather report.