JPMorgan has a stark message on climate change

Businesses and investors are always thinking about risk. Risk from things that haven’t happened yet but could happen in the future. That could be anything from the risk of getting sued to an economic crisis or a risk from a cybersecurity threat.

Many companies try to plan for these types of risk and make contingency plans for possible emergencies.

Companies are increasingly considering the potential risks from climate change and the economic impact that a warming planet could have.

And now one of the biggest banks in the world has told its client that there’s an even bigger climate risk they should consider.

The business impact of climate change

Physical climate risk is already being felt in the insurance and real estate markets, where increased risks from flooding and fires have raised costs for homeowners, a report from JPMorgan finds.

“There’s no question that climate change will have business impacts,” Sarah Kapnick, global head of climate advisory at JP Morgan, said in a statement.  

While climate change is often thought of as gradual, potential events called tipping points could accelerate these risks exponentially, Kapnick said. This, in turn, could impede decision-making for company executives, she added.

“These climate black swan risks may be unlikely but highly consequential, with considerable uncertainty about when or how quickly they could materialize,” she said.

What are climate tipping points?According to the JPMorgan report, climate tipping points are temperature thresholds that push certain ecosystems into a new state of change that creates irreversible damage.Some of the tipping points identified include the melting of the ice sheets in Greenland, coral reefs dying off, the Amazon rainforest collapsing, and the currents in the Atlantic weakening and causing temperatures in North America and Europe to plummet.Once this tipping point is reached, the speed of the change can either accelerate or decelerate.Some scientists have warned that we’ve already reached a tipping point for coral reefs, which are in the midst of global bleaching due to extreme ocean temperatures, The Guardian reported.  

Economic models, however, aren’t able to account for tipping points.

That’s because analysts use historical data to make estimates, while these future events are uncertain. This means pricing in future risk can be difficult, the report contends.

A potential climate tipping point could have a lasting economic impact, a new report from JPMorgan says.

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JPMorgan’s recommendation on preparing for unknown risks

Banks regularly look at all types of risk, including climate risk. But tipping points are a new area of risk for banks.

This is a relatively new area, with very few frameworks for businesses to help them plan. Some of these tipping points may even be impossible to plan for, “as they would represent fundamental shifts across entire markets unfolding over decades with societal uncertainty layered on top of climate science uncertainty,” the JPMorgan report says.

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Tipping points are usually left out of scenario analysis, making it difficult to know their full economic impact. The report from JPMorgan recommends that companies expand their approaches to consider potential abrupt changes rather than slower-moving trends, as revenues and consumer preferences could shift even before an event occurs.

How people should respond and plan for these risks depends largely on the role they play, JPMorgan states. For example, pension funds or family offices might diversify their investments across different sectors and geographies and run scenarios that include tipping points.

Tipping point risk is also likely to be priced in gradually and then suddenly as more scientific evidence on events reveals more information on their probability, the report finds.

In other words, investors and analysts might soon be thinking about more than just legal risk when pricing a company. And those who priced it in early on might be the ones who stand to benefit financially.

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