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Harvey and Irma Could Have a Silver Lining

Since hurricanes Harvey and Irma have unleashed their wrath on the U.S. – 2 ‘thousand year’ and $100+ billion in damage events in one month – the battle lines that have been drawn between climate change believers and deniers could not be more distinct. Irma has literally brought climate change to doorstep of President Trump’s Winter White House. As is often the case, it takes a calamity in a center of power and influence (Miami or Houston versus the Maldives) to focus attention on an issue that millions of people around the world live with on a daily basis. Just as it took about 30 years to move Corporate Social Responsibility from a ‘nice to have’ to a ‘need to have’ in business, being ‘green’ and environmentally conscious is on a similar trajectory. The world’s ability to tackle climate change is the tragedy of the commons of our times and perhaps the greatest risk we have ever faced – and our greatest risk management failure.

Climate change was once managed as an ‘externality’ by risk managers and quants – one so big that they could not conceivably factor it into their pricing models or risk hedging strategies. Today, climate change and the urgent need to find solutions to it, is no longer being treated as an externality, but rather something for which organizations and countries must be prepared. Global leadership, consensus, and above all agility are needed to begin arresting the rate of climate change and improving global resilience to it. For sensible solutions to emerge from governments around the world, the economic costs of climate risks can no longer be ‘transferred’ away by government subsidies and national catastrophe insurance programs that amplify moral hazard – which is risk taking without risk bearing.

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