1. Climate Change and Security: Risks and Opportunities

(www.lloyds.com) – A Lloyd’s of London – International Institute for Strategic Studies (IISS) 360° Risk Insight Report, Climate Change and Security, identifies the following seven points in its Executive Summary:

• No one knows how quickly climate change will happen or how severe the consequences will be; however, scientists increasingly believe climate change consequences will be much worse than originally thought. Although effects of climate change may develop gradually, it is more likely we will experience abrupt and dramatic shifts in weather patterns. This makes long-term planning and risk assessment extremely difficult and means plans will need to encompass a range of possible outcomes and be revised regularly.
• Climate change need not prevent well-run organizations from succeeding, but it can never again be business-as-usual. Climate change is likely to result in major changes to most areas of life: how cities and buildings are designed, how transport systems function, and how production and trading systems are organized. It will also result in greater competition for increasingly scarce resources, such as water, food and energy. At worst, the world may see a rise in economic nationalism, increased inter-state conflict and higher levels of global insecurity.
• Water will become a scarce commodity commercially and strategically. It will rain more in a warmer world, but rainfall patterns will change and some areas will become drier. Water will become a scarce and expensive commodity in many countries and in some parts of the world it could become a source of interstate conflict. Developing systems for using water more efficiently will literally become a matter of life or death for the worst affected regions.
• Climate change means food production will increasingly fail to meet demand, and global food markets could change substantially. Agribusiness will need to focus on developing sustainable production techniques. The greatest early impact of global warming will be on food supply, which even now is barely adequate to meet demand in many regions of the world. As arable land becomes scarcer, probability of state failure and conflict between states is likely to increase. Food will increasingly be produced close to where it is consumed. The development of biofuels could put further pressure on scarce arable land and could contribute to food shortages.
• Under climate change, energy markets are likely to become more volatile and unpredictable. Fossil fuels – in particular coal and oil – are the biggest single source of carbon emissions and reducing dependence on these is critical to mitigating the impact of climate change. However, this change will take time. Mankind will continue to rely on fossil fuels for the foreseeable future and competition could lead to international friction while developing countries may need time and financial assistance to adapt to alternative energy sources.
• There is risk of mass migration from the developing to the developed world because the less advanced economies closer to the equator will suffer most from climate change. Drought will be most intense in the sub-tropical regions, notably the Mediterranean, Middle East and North China. Without effective adaption programmes, migrant flows could swell dramatically, pressing against the borders of less affected countries. Building mechanisms to mitigate and manage such flows will increasingly become a preoccupation for countries in the developed world. This could involve large-scale and expensive humanitarian interventions well beyond anything seen to date.
• Business has a vital role to play in the mitigation of and adaption to climate change. There are limitations to what governments can do on their own. They will need to harness the creativity, inventiveness and organizational capacities of the private sector by developing specific technologies to mitigate and to adapt to climate change and to change behavior patterns among consumers. The latter is particularly important and business can play an important role. Unless people alter their priorities and behavior, efforts by government and the business sector to deal with climate change are likely to be unsuccessful.

2. Sustainable Energy Security: Strategic Risks and Opportunities

(www.lloyds.com) – A Lloyd’s of London 360° Risk Insight Report, Sustainable Energy Security, outlines how humans have entered a period of deep uncertainty in how to source energy for power, heat and mobility, and how much it will cost. Below are the nine points from the Executive Summary:

• Businesses which prepare for and take advantage of the new energy reality will prosper – failure to do so could be catastrophic.
• Market dynamics and environmental factors mean business can no longer rely on low cost traditional energy sources.
• China and growing Asian economies will play an increasingly important role in global energy security.
• Humans are heading towards a global oil supply crunch and price spike.
• Energy infrastructure will become increasingly vulnerable as a result of climate change and operations in harsher environments.
• Lack of global regulation on climate change is creating an environment of uncertainty for business, which is damaging investment plans.
• To manage increasing energy costs and carbon exposure, businesses must reduce fossil fuel consumption.
• Business must address energy-related risks to supply chains and the increasing vulnerability of “just-in-time” models.
• Investment in renewable energy and “intelligent” infrastructure is booming. This revolution presents huge opportunities for new business partnerships.

3. Global Water Scarcity: Risks and Challenges

(www.lloyds.com) – A Lloyd’s of London 360° Risk Insight Report, Global Water Scarcity, discusses the future of the world’s water supplies, which is a story of increasing stress, as indicated in the report’s seven points below:

• The world’s population is expected to peak at about nine billion by 2050. The additional food and water requirements that this implies are significant, given that most of the three billion additional people will live in the developing world, often in places where water resources are already stressed and increasingly in cities, which are poorly served by water and sanitation service infrastructure.
• Rises in the standard of living in developing countries tends to result in higher per capita water requirements, especially through shifts in demand for different food crops.
• Economic growth requires a direct water supply (for increasing domestic, agricultural and industrial use) and the maintenance of water supplies to energy production (for instance, cooling water for thermal power plants or river flows for hydropower.)
• Increasing water infrastructure development to meet water and energy demands results in the alteration of freshwater systems and potential conflicts between upstream communities and their downstream “rivals” for water.
• Climate change predictions indicate greater variability in rainfall in many parts of the world, the melting of ice packs and reduced water availability in many of the current food and fibre producing regions of the world, as well as an increase of flood risk to growing cities.
• Collapsing wetland, river, lake and estuary ecosystems reduces their resiliency and ability to directly provide flood attenuation, waste assimilation and food production.
• An increasingly carbon-limited world could restrict adoption of carbon-intensive technology in the longer term to solve water scarcity, such as energy-hungry desalination schemes and the pumping of water between river basins.

These changes are likely to be exacerbated by the lack of strong and politically independent water management institutions across much of the developing world, which restricts ability to effectively use water in a changing world.

4. Arctic Opening: Opportunity and Risk in the High North

(www.lloyds.com) – A Lloyd’s of London 360° Risk Insight Report, Arctic Opening, discusses the pace of the environmental transformation currently taking place in the Arctic. One thing that stands out most clearly is the significant level of uncertainty about the Arctic’s future. The Executive Summary points are listed below:

• Rapid and disruptive change in the Arctic environment presents uneven prospects for investment and economic development. Environmental changes, especially those linked to global climate change, are giving rise to a broad set of economic and political developments. Sustainable realization of the economic opportunities that result from these developments depends on strong regulatory frameworks and corporate environmental stewardship. All across the Arctic, changes in climate will create new vulnerabilities for infrastructure and present new design challenges.
• The Arctic is likely to attract substantial investment over the coming decade, potentially reaching $100 billion or more. Oil and gas, mining and the shipping industries will be the biggest drivers and beneficiaries of Arctic economic development. Based on current trends, expected investment in the Arctic could reach $100 billion or more over the next decade. However, given the high risk/potentially high reward nature of the Arctic investment, this figure could be significantly higher or lower.
• Significant knowledge gaps across the Arctic need to be closed urgently. Uncertainties and knowledge gaps exist around the nature of environmental change, the geological potential of the Arctic and environmental baselines, as well as seabed mapping and how to deal with the risks of significant Arctic industrial activity. Governments, research institutes, non-governmental organizations and businesses can help close these gaps as a way of reducing risk and ensuring development takes place within sensible, defined, ecological limits.
• Arctic conditions will remain challenging and often unpredictable. The Arctic will remain a complex risk environment. Many of the operational risks to Arctic economic development – particularly oil and gas developments and shipping – amplify one another. At the same time, the resilience of the Arctic’s ecosystems to withstand risk events is weak and political and corporate sensitivity to a disaster is high.
• The environmental consequences of disaster in the Arctic are likely to be worse than in other regions. While particular risk events – such as an oil spill – are not necessarily more likely in the Arctic than in other extreme environments, the potential environmental consequences, difficulty and cost of clean-up may be significantly greater, with implications for governments, businesses and the insurance industry. Transborder risks, covering several jurisdictions, add further complications.
• The politics of Arctic economic development are controversial and fluid. Given the Arctic’s iconic status and sensitive environment, Arctic development is often politically contentious, with sometimes opposing interests and perspectives between local, national and international levels. Political support for development will continue to represent an uncertainty for businesses seeking to invest in Arctic projects.
• Governance frameworks in the Arctic should continue to develop in their current direction and be reinforced where possible. There are major differences between regulatory regimens, standards and governance capacity across the Arctic states. The challenges of Arctic development demand coordinated responses with viable, common standards where possible, transparency and best practices across the north. These frameworks need to be in place to enable sustainable development and uphold the public interest.
• Risk management is fundamental for companies to work safely, sustainably and successfully in the Arctic. Companies operating in the Arctic region require robust risk management frameworks and processes that adopt best practice and contain worst case scenarios, crisis response plans and full-scale exercises.

For more information on Lloyds of London, please read this issue’s Hard Choices.