WORKING SESSION 20
Disaster Risk in the Financial System
Draft Concept Note
1. Why is this topic important and worth a Working Session ?
Dedicated disaster risk reduction measures can save lives and livelihoods, and reduce and avoid losses in the
economic, physical, social, cultural and environmental assets of societies, but unless disaster and climate risk
are revealed in all financial transactions and throughout the financial system, the realisation of the expected
outcomes of the current and post-2015 frameworks for disaster risk reduction will be fundamentally
challenged. Institutional investors1 for example, held over $83 trillion in assets in 2012, of which less than 1
percent was invested in climate resilient infrastructure. At the 2014 UN General Assembly, global leaders
from States, business, finance and civil society recognised the relationship between the wellbeing of
individuals and communities and the resilience of the wider financial system to disaster risks. This session will
therefore draw attention to the invisibility of disaster and climate risk within the financial system, and
examine practical and consistent approaches to overcome this challenge at local and global scales across
public, private and mutual sectors.
2. What gaps need to be filled ?
With rapidly changing demographics, expanding and increasingly wide distribution of wealth and assets, the
disaster and climate risk landscape is altering rapidly and will be compounded by the invisibility of disaster risks
in the financial system and economic decision-making by both the public and private sector. The guiding
principles and established techniques to reorient the allocation of capital toward disaster resilient public and
private investment exist. However, coherent and complementary efforts that bring together multi-disciplinary
scientific information, financial regulation, accounting practices and ratings are needed if the vulnerabilities of
populations, economies, institutions and investors to disasters and climate change are not to be exacerbated.
3. What (new) commitments are expected to be achieved ?
Announcements are expected from business and industry, the scientific community and the United Nations
with respect to the development of a climate smart investment framework for assets under management, the
establishment of a risk modelling and mapping forum, the incorporation of disaster risks into the Design of a
Sustainable Financial System and its alignment with sustainable development, and the integration of disaster
risk information into investment decision making.
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including pension funds, endowments, foundations, investment funds and insurers
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Schedule
12:00 – 13:30, Monday 16th March, 2015
Room and Venue
Main Hall, Sendai International Conference Centre
Organizers
Colombia, Mexico, The Netherlands, New Zealand, Philippines, UK.
Accounting for Sustainability Project (A4S), Carbon Disclosure Project (CDP),
International Association of Insurance Supervisors (IAIS), International Cooperative
and Mutual Insurance Federation (ICMIF), International Insurance Society (IIS),
Sustainable Stock Exchanges Initiative (SSEI), PwC, RMS, UNEP PRI, University of
Wisconsin, Willis Re, the World Economic Forum, and the World Bank.
UNISDR Focal Points
Marc Gordon, Kiki Lawal, Bina Desai
Background and
Rationale
This session will examine how disaster and climate risk remains largely invisible
within the financial system, and explore practical and consistent approaches to
overcome this challenge at local and global scales across public, private and mutual
sectors.
Disaster risk must be revealed in all financial transactions; dedicated disaster risk
management mechanisms are not enough. These risks must be incorporated into
capital: into every transaction, infrastructure investment, bank loan, equity price on
stock exchanges, and into the accounts of every country and city.
While there have been significant achievements in many areas under the Hyogo
Framework for Action (HFA), it is in reducing underlying risks (Priority for Action 4)
that the least progress has been made. This has prompted increased demand for
simultaneous action to reduce existing, underlying risk to populations and assets, to
prevent the creation of new risk, as well as strengthening societal resilience.
Populations are increasing, wealth is growing and the climate is changing, and
unless appropriate reforms are made, risk will grow significantly in the decades to
come, at the cost of millions of lives and livelihoods, and trillions of dollars in loss
and damage. This is a structural problem and it requires a systemic response. Such a
response can reduce or eliminate the vulnerabilities that will be inherent in
economic and social investments of the 21st century that fail to address these risks.
There is a growing recognition that financial regulation, accounting practices, ratings
and improved integration of multi-domain scientific information are central to
addressing this challenge effectively and proportionately. The guiding principles and
established techniques to reorient the allocation of capital toward resilient
investments exist. Yet the incentives and perverse rewards enjoyed by both public
and private investments that amplify vulnerability to natural disasters continue. The
consequences of inaction for exposed populations, economies, investors and
institutions are catastrophic.
The current requirements for public and private institutions to evaluate and disclose
these risks are limited. Many organisations and individuals are unaware of their
exposure and especially the interdependencies between hidden risks which carry
the potential for systemic destabilisation. Consequently disaster and climate risks
are largely invisible within the financial system; they are largely ignored in
investments and are inadequately incorporated into economic decision making.
Prevailing practice demonstrates that natural disaster risks have been difficult for
the financial system to quantify and integrate in decision making. This continues to
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be compounded by the relatively short term horizon of public and private sector
decision makers. Unless this market failure is addressed, personal, private and
public finance will continue to flow towards vulnerable investments, increasing the
stock of risk within the global financial system and the likelihood and scale of
potential losses in the future.
The global insurance sector, together with accounting, regulatory and rating
institutions, has had to address this challenge. Facing systemic crisis twenty five
years ago, the insurance industry has since engineered a shift to relative resilience,
even as risks and disasters have risen. The essential components of this
transformation were:
a.
b.
c.
risk sensitive investment capital which demanded that insurance companies
were able to quantify and demonstrate their ability to manage disaster risk;
the development of clear and consistent metrics to evaluate and communicate
risk between stakeholders and the development of an enabling analytical
ecosystem;
the development of clear standards of annual disaster resilience applied by
financial regulators and credit rating agencies, based on these metrics, coupled
with transparency through requirements to evaluate these risks in annual
accounts and other financial reporting.
Over the last quarter of a century these elements have developed into a wellestablished system that can bring societal benefit at a global scale. Together they
represent significant practical experience in how to effectively incorporate disaster
and climate risks into decision-making across all capital, and provide guidance on
how to systemically reduce vulnerability and increase resilience in communities and
across the wider economy by making risks visible.
Session Objectives
1.
2.
3.
4.
To identify how integrating disaster risk into the financial system supports the
implementation of HFA2, by tackling the creation of new risk and promoting the
reduction of the existing stock of risk.
To describe the market failure and raise awareness of the scale of the problem,
sharing the experiences of different actors in revealing hidden risks / liabilities/
inter-dependencies.
To explore how institutions of the global financial system - including regulators,
credit rating agencies, stock exchanges, accountants, actuaries and investors are a central part of the responsible DRR community with an obligation to
support the implementation of the post-2015 framework for disaster risk
reduction.
To discuss integrating risk into the financial system and the ‘1 in 100 Initiative’
announced at the UN Climate Summit, and provide the opportunity for States
and other stakeholders to commit to support the Initiative.
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Discussion agenda
and structure
1.
Introduction and welcoming remarks by the Moderator and outline of session
and its objectives
Moderator:
Robert Muir-Wood, Chief Research Officer, Risk
Management Solutions
2.
Keynote speech.
Dominic Casserley, CEO, Willis Group Holdings.
3.
Panel discussion
a.
Sebastian von Dahlen, Chairman, G-AWG, International Association of
Insurance Supervisors
b.
Gordon McBean, President, International Council of Scientific (ICSU),
and Director, Policy Studies, Institute for Catastrophe Loss Reduction,
University of Western Ontario, Canada
c.
Gil Buenaventura, President and CEO of the Development Bank of the
Philippines, Republic of the Philippines.
d.
Takejiro Sueyoshi, Special Adviser, UNEP Finance Initiative, Japan
e.
Shaun Tarbuck, Chief Executive, International Cooperative and Mutual
Insurance Federation
4.
Interactive guided discussion
5.
Concluding remarks by panelists and conclusion by the Moderator
Expected outcomes
At the conclusion of this session, States and other stakeholders will:
▫ be made more aware of the pervading invisibility of disaster and climate risk
within the financial system,
▫ understand that practical and consistent approaches to overcome this
challenge at local and global scales across public, private and mutual sectors do
exist,
▫ be familiar with, and invited to contribute to, initiatives seeking to integrate
disaster and climate risk in the financial system.
Commitment /
special
announcement in
support of a post2015 framework for
DRR
Announcements are expected with respect to:
 Developing a disaster and climate smart investment framework - ICMIF and IIS
 The establishment of the Risk modelling and mapping Forum - WillisRe
 Commitment to integrate disaster risk information into investment decision
making through the inclusive multi-stakeholder alliance - R!SE Initiative
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