Environmental Social Governance (ESG)

Time for a co-ordinated disaster planning and climate change response

By Dr Ian Woods
Co-Head of Sustainable Investment Sydney, Australia

The February 2019 Queensland floods saw almost 2,000 mm of rain fall on parts of the state, according to the Bureau of Meteorology. This event has raised questions about how insurers and governments plan for natural disasters, as well as how infrastructure and energy companies can better manage the risks their assets face from floods and other weather events.

Catastrophes of this nature are becoming more frequent and erratic, prompting urgent discussions about public policy around natural disaster planning, as well as long-term thinking about planning for the infrastructure assets they inevitably damage or destroy.

Potential for public and private co-operation around insurance

This year’s Queensland floods follow a long line of other disasters including the severe floods in the state in 2011.

As a result, some insurers have stopped writing property insurance in some parts of Queensland because of the difficulty associated with pricing risk from floods and cyclone damage. AMP Capital recently met with management teams from several insurance companies, which allowed us to explore the challenges they are facing in more detail.

These challenges include:

  • Lack of availability and consistency of data to predict future climate change impacts.
  • The importance of developing resilient systems for critical infrastructure, as well as identifying weaknesses in systems before disasters.
  • Appropriate government support when funds need to be spent protecting private properties from potential natural disasters.

In the face of these and other issues, the government and other stakeholders realise the need to develop a National Adaptation Action Plan to help prepare for future natural disasters.

Governments have a role to play in flood mitigation and preparation ahead of disasters. Because insurable costs form only part of the total cost of these disasters, government involvement is an important part of containing the economic impacts after a natural disaster.

Links to federal climate change policy

Climate change and Australia’s energy policy are closely associated with more frequent severe weather events. These issues are high on the public agenda in the lead up to this year’s federal election.

Any change in government is likely to result in new climate change policies, which would have a flow-on effect to energy markets. Utility companies and transmission and network businesses, as well as infrastructure assets more broadly, would be impacted. For instance, they may be required to increase investment in clean energy assets as a result of a change in government policy.

The Clean Energy Finance Corporation (CEFC) could play a key role and its funding is expected to increase significantly under a Labor government. This body currently invests $10 billion in clean energy projects on behalf of the Australian government. A change in government may lead to a higher focus on the development of renewable energy generation assets in Australia. An important consideration is funding structures for new projects, with a number of different options possible.

CEFC funding could be used to facilitate private capital, change the risk profile for private capital or replace private capital by requiring lower returns in any investments. This may help reduce the impact of higher energy costs on consumers and businesses.

The cost of renewable energy is increasingly competitive with new and existing energy generation systems. But the challenge is connecting renewable resources to transmission systems and addressing concerns over grid stability and generation capacity reserve when energy demand is at its peak. Other issues to be addressed include how to include household generation systems in the network and the role of batteries.

Utility companies, investors and governments have much to consider to address these challenges and turn some of them into opportunities.

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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