Climate Change and Economic Impact. Tools Available to Industry
We now have reasonable certainty that this is caused by human activity, particularly by the emission of CO2 from the burning of fossil fuels (IPCC, 2014). One of the clearest and most direct indications of this comes from alpine glaciers. Comparing the earliest photographs of glaciers, taken around 1850, with the current situation provides an extraordinarily clear picture of what has changed since then: their expanse and thickness has been reduced and some are disappearing, or will within the next few years.
Another consequence of global warming is the rise in frequency of extreme meteorological events. This is due to the fact that, if the planet’s temperature increases, the energy available in the atmosphere to power meteorological systems also increases. One concrete example is the autumnal storms that are fed mostly by vapours from the sea’s surface. If there are more vapours, we’ll have more intense evaporation and so more “fuel” available for our storms. The same mechanism is being investigated for tropical hurricanes, which are becoming more powerful. Still, the increasingly extreme climate involves all its aspects: occurrences of intense heat, droughts in tropical areas, and so on, are increasing.
Climate change is now part of our lives. And, even though some still deny it, 2018 has 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 entity DNV GL (one of the most important agencies for classification, verification and management services for environmental risks) in collaboration with the market research institute GfK, these companies still not prepared to face the risk of global change. 40% of Italian companies, in fact, admit that climate has an effect on at least one of the main sectors of their business, but there are still very few that have taken action.
For quite some time, the Enel Group has been working – collaborating with academic and meteorological authorities – on better advanced meteorological instruments, aimed at climate predictions and the use of their potential benefits for industry. The importance of the studies conducted and the initial results was confirmed by our winning a European Commission tender, as part of Horizon 2020. This project aims to improve interactions between industry and research, in order to refine our forecasting abilities for atmospheric phenomena, as well as to help affected companies manage their consequences.
So, how can we help companies defend themselves from sudden and at times devastating meteorological events? For a company, it’s essential to understand what exposure they have to climate risks, that is, the impact of climate variability on its margins, both in the long and short term.
The Enel Group, as concerns its risk structure, began to assess the consequences of climate change and to connect them to business issues a few years ago.
Specifically, we are equipping ourselves with tools to help us understand how increasing variability in climate phenomena impacts our ability to effectively manage electrical energy production and the economic results associated with this.
This is why our knowledge about financial risk management tools has been refined over time. These are necessary to limit the impact of the increasing unpredictability of atmospheric events on company profitability: so-called “weather derivatives”. Given that now we can no longer ignore the existence of these phenomena, we must try to control their impact on business results by using suitable tools that unite energy and climate risk.