[Square] Fire on the Foot, Climate Crisis

In January 2019, while the Northern Hemisphere, including the United States, experienced severe cold waves, the Southern Hemisphere, including Australia, faced extreme heatwaves simultaneously, and Europe also recorded its highest summer temperatures that year. As dry areas expanded, large-scale wildfires increased, similar to those in southeastern Australia two years ago and the western United States last year. Frequent occurrences of major typhoons and hurricanes were also observed, all caused by climate change.

Evidence of climate change is abundant and need not be sought far away, such as the prolonged rainy season and successive typhoons landing on the Korean Peninsula last summer, the record-breaking heatwave in the summer of 2018, and the latest research results from the National Oceanographic Research Institute showing the accelerating rise of sea levels along the Korean Peninsula’s coast.

As various disasters occur frequently worldwide due to climate change and damages increase, climate change has become an urgent climate crisis for humanity. Moreover, scientific evidence has proven that greenhouse gas emissions from human fossil fuel use are the main cause of the climate crisis, making policy responses to reduce carbon emissions, a representative greenhouse gas, an urgent task.

The 2015 Paris Agreement, a result of international discussions on responding to the climate crisis, is a new climate crisis response system that imposes obligations not only on developed countries but on all participating countries, including developing nations. South Korea has also declared its goal to achieve carbon neutrality by 2050 and has introduced the ‘2050 Carbon Neutrality Promotion Strategy’ to this end.

Among these efforts, financial policies to address the climate crisis focus on establishing a green taxonomy to facilitate smooth capital flows into low-carbon industries, strengthening climate-related disclosures, and building market infrastructure to enable voluntary responsible investments. Especially, encouraging autonomous participation from market players such as financial companies will determine the success or failure of future climate crisis responses.

The climate crisis and the policy shifts to address it present both challenges and opportunities for financial companies. Financial companies can contribute to climate crisis responses through underwriting climate risks and managing eco-friendly assets, while also gaining opportunities for profit generation in the process. In particular, the insurance industry can promote efficient risk management through pricing mechanisms and effectively raise funds needed for building low-carbon, eco-friendly industries and infrastructure during asset management, thereby contributing to the real economy.

Financial companies must proactively recognize and manage the impacts of physical risks caused by natural disasters brought on by climate change and transition risks arising from policy changes in the climate crisis response process across the entire company. It is necessary to reflect climate risks throughout management processes such as risk management and internal controls. By doing so, financial companies can realize profits, fulfill corporate social responsibility, and enhance reputation and social trust.

Active participation of financial companies in responding to the climate crisis can be more effectively induced by refining the climate disclosure system and strengthening market discipline. Additionally, establishing a green taxonomy to evaluate corporate business activities from the perspective of climate crisis response is the foundation for effective market discipline.

Climate change is already causing various forms of natural disasters, leading to a climate crisis, and if we fail to recognize the seriousness of the climate crisis now and respond effectively, it will soon become a climate catastrophe. The greatest victims will be our future descendants. With this in mind, the climate crisis is truly a fire on our doorstep.

Seungjun Lee, Research Fellow, Korea Insurance Research Institute