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Global Assessment Report on Disaster Risk Reduction 2013
From Shared Risk to Shared Value: the Business Case for Disaster Risk Reduction |
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Global Assessment Report on Disaster Risk Reduction 2013
From Shared Risk to Shared Value: the Business Case for Disaster Risk Reduction |
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244 Chapter 16
reduced. This is particularly important give new and emerging perspectives on claims and compensation.
If both disaster risks internalised in a business’s own assets and operations as well as shared risks that are transferred to others are accounted for and reported, then investors would be able to factor these risks into their investment decisions, avoiding businesses with high and unmanaged disaster risk. Improved reporting would also encourage disaster risk to be factored into analyst and credit ratings, which would further encourage businesses to invest in effectively managing their disaster risks.
Similarly, improved reporting may contribute to more sensitive insurance pricing. Insurance pricing could then become another important catalyst for greater transparency in equity markets and more prudent investment practices (Stahel and Orie, 2012).
One issue that needs to be addressed is agreement on common standards and metrics for measuring and quantifying disaster risks. Estimating the cost of shared risks is not a trivial exercise, particularly when it comes to valuing natural capital. As a result, performance criteria for investment contracts and loans that take natural capital—and disaster risk considerations—into account have yet to be identified (Cambridge Programme for Sustainable Leadership, 2011b
Cambridge Programme for Sustainable Leadership. 2011b.,Increasing mainstream investor understanding of natural capital. Part B: Evidence., The Cambridge Natural Capital Programme. University of Cambridge., Cambridge,UK.. . TEEB (The Economics of Ecosystems and Biodiversity). 2010.,Integrating the ecological and economic dimensions in biodiversity and ecosystem service valuation., In: Ecological and Economic Foundations, TEEB Document.. . Universal ownership of disaster risks
Other concepts such as ‘universal ownership’ have the potential to encourage risk-aware investing by large institutional investors, such as pension funds and sovereign wealth funds. Given that these funds have a fiduciary responsibility to their beneficiaries for prudence and to provide sustainable long-term
income, there is a strong incentive to make investments that avoid the generation of shared disaster risks.
In principle, fund beneficiaries can gain from reduced environmental costs associated with fund investments, i.e. by reducing the corporate externalities of business investments, the value of the funds can increase, and costs—such as higher taxes to compensate for externalities—can be significantly reduced (UNEP FI and PRI, 2011
UNEP FI (United Nations Environment Programme Finance Initiative ) and PRI (Principles for Responsible Investment). 2011.,Universal Ownership. Why environmental externalities matter to institutional investors., Geneva: UNEP Finance Initiative and Principles for Responsible Investment., Geneva,Switzerland.. . The effectiveness of universal ownership will depend on overcoming information asymmetry, in which providers of investment opportunity know more than investors and control the information of those whose money they manage. Although fund managers may have fiduciary responsibility for prudence, this will be reinforced if beneficiaries actively encourage investments that do not lead to increasing disaster risk.
Given the volume of capital under the management of large pension and sovereign wealth funds, the effective application of the principal of universal ownership could provide a major incentive for businesses to manage their disaster risks more effectively and to ensure that their investments are risk-neutral. Stronger emphasis and direction of asset owners to their managers to integrate disaster risks into their investment strategies across all asset classes could generate significant change (IIGCC et al., 2010).
16.6
The business of
managing disaster risks
The size of the market for disaster risk reduction is potentially huge. The World Bank, for example, estimates that climate change adaptation will require investments of US$75–US$100 billion annually between 2010 and 2050 (World Bank, 2010
World Bank. 2010.,Economics of Adaptation to Climate Change., Synthesis Report., Washington: IBRD and World Bank.,. . |
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