Japan's Tokio Marine to calculate climate-related risks

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Japan's Tokio Marine to calculate climate-related risks

Tokio Marine and Nichido Fire Insurance will launch as early as fiscal 2022 a service that calculates the risks to businesses from environmental regulations abroad, helping businesses better plan their strategies amid a growing global push to fight climate change.

While there exist are already services that forecast losses from floods and other natural disasters caused by climate change, one which accounts for government regulation is rare. The British insurer will partner with Risilience, a Japanese risk assessment company specializing in climate change, on the endeavor.

Clients will be able to immediately ascertain the potential financial hit from building a new factory or office in a specific country or region, plugging in factors like output capacity, floor space and suppliers. The model will account for changes in local policies, like a new carbon tax or an end to fossil fuel subsidies.

For example, the model might predict a $500 million hit to company profits over five years by a carbon tax and new rules on carbon trading.

In addition, the service can also predict how environmental boycotts and other issues could squeeze sales.

The effort will make several calculations based on different scenarios, such as if the target country makes no decarbonization efforts over the next five years or if it sticks to goals set under the Paris Climate Agreement in 2015. Client companies can compare the figures in order to plot their best course of action.

The demand for such forecasts is expected to grow as companies face increasing pressure to disclose climate-related information. The Task Force on Climate-related Financial Disclosure, an international body compiled by the Financial Stability Board that monitors the global financial system, recommends that companies disclose their plans for decarbonization. Starting this spring, Japan is expected to essentially require publicly traded companies to analyze and disclose climate-related risks.

Tokio Marine has recently taken a stake in Risilience, which was established by a team of experts at Cambridge University in 2016 studying potential risks that could arise during the transition to a low-emission society. It calculates the likelihood of various risk scenarios as well as their potential impacts on corporate profits and valuations.