Only 6% of firms believe climate risks is priced correctly: RPT

GARP Risk Institute President Jo Paisley joins Yahoo Finance to discuss how companies are starting to calculate climate risk and the impact this new focus will have on the market moving forward.

Video transcript

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- A new survey from the Global Association of Risk Professionals looks at how many firms are using scenario analysis when they're trying to assess climate risk. Because as we know, that risk is rising. And it finds that most of them are doing so.

Jo Paisley is with us now. She is co-president at the Global Association For Risk, or excuse me, the GARP Risk Institute. She is the president there. Jo, what should we take away from this survey? What does it tell us about how risk professionals are reacting to or trying to predict the risks out there?

JO PAISLEY: Well, thanks a lot for inviting me along today. And what we find is that-- we've done it for three years now, the survey-- and we're seeing kind of increasing, modest increases, I should say, in sophistication across the firms. And as you note, a number of firms are using scenario analysis. And not just using it, but they're actually taking action on the back of it. So that's really a positive trend.

- And if it is a positive trend, does that mean-- what does that say about readiness, then? In other words, if they're doing these scenario analysis, what's then the next step?

JO PAISLEY: Well, firms are doing this in our analysis and they're evaluating a range of different actions. So some firms are looking at whether their risk management needs to change, whether their firm strategy needs to change, whether they've got particular concentrations of risk that they're worried about, whether their pricing needs to change.

So there's a range of things you can do on the back of scenario analysis. I wouldn't say that they're necessarily ready, but they're certainly learning more and getting more proficient at using that particular tool.

- And Jo, what changes do you see companies making in light of these increased risks?

JO PAISLEY: Well, there's sort of changes going on in the real economy and then changes going on in the financial system as well. Our survey looks at the financial system, at banks, asset managers, and insurance companies primarily. And in there, in the financial firms, we see an awful lot of governance going on with boards, talking about how their firm strategy should be changing.

We see a huge amount of product innovation. So new products coming in or existing products being changed. We also see firms increasing their staffing levels to kind of try and get more equipped. And I think the other thing of note is that we see a lot more interest from supervisors, which is probably really focusing the minds of those financial firms.

- You know, earlier in the show, I was talking about how flood insurance here in the United States is set to change because some subsidies for that insurance from the federal government are going away. And that brings me to one of the other points in your survey, which is that climate risk is widely seen as improperly priced.

Only 6% of the firms you surveyed believe that that climate risk is priced correctly, which is maybe not such a shocking number, right, considering perhaps how far behind we are on this. So how do we get that fixed? How does climate risk get repriced and re-rated to better reflect the amount of risk out there?

JO PAISLEY: Yeah. No, it's a good question. And it is quite a shocking statistic, isn't it? Only 6%. But on the other hand, quite a lot of them do think that it's partially priced. And I think what we're seeing across the risk profession and the finance profession, is just a growing awareness, a growing understanding of the risks.

But also, you know, you need good quality data. You need to be able to model this. And those things take time to develop. And so we're seeing the emergence of new professional level of expertise, if you like. And the firms are also learning from one another as well. So I think you'll see over time, a growing level of sophistication. I'm certainly hoping so.

- Yes. I hope so also. Jo Paisley. Thanks so much for bringing us the results of this survey. President of the GARP Risk Institute. Thanks so much.