September 28, 2023

Navigating Climate-Related Risk: The Intersection of Risk, Regulation and Climate Change

Alejandro Martí (Alex), CEO and Co-founder of Mitiga Solutions, recently sat down for a podcast interview with ITNIG, during which he explored critical topics at the intersection of risk, regulation, insurance, climate hazards and machine learning, under the overarching challenge of climate change. In this article, we share some of the key takeaways from this discussion and how they shape the future of risk management and environmental responsibility. The full interview in Spanish (below) is also available on ITNIG Youtube channel

Risk and Regulation 

Starting in January 2023, a new regulation came into force mandating all companies to report their climate-related physical risks. Under this regulation, companies move from voluntarily reporting risks such as wildfire hazards, flooding, extreme temperatures to a mandatory requirement.  representing a shift towards greater transparency and accountability regarding climate-related risks. The goal of these regulations is to raise awareness of climate-related risks associated with various assets and to learn how companies plan to manage their physical and transition risks. 

Drawing parallels between this new regulation coming into force and the evolution of energy certification, Alex said, “It's like the energy certification that started as voluntary, then became necessary and is now obligatory. The European Commission aims to create awareness of climate risk associated with every aspect of businesses." Climate risk reporting is expected to follow a similar trajectory as awareness and regulations continue to develop. 

Insurance, Hazards, and Machine Learning 

When discussing the role of Mitiga in Insurance, particularly in managing climate-related risks, such as wildfires, Alex said, “We work with insurers, reinsurers and financial sectors. Our models help them calculate potential risks, which translate into insurance pricing.” 

When it comes to wildfires, for example, traditional probabilistic models often fall short in capturing the increased frequency and magnitude of wildfires due to climate change. In contrast, Mitiga leverages physical models that consider a range of factors to provide more accurate simulations of natural hazards and help inform decisions, such as underwriting policies or setting insurance premiums. Machine learning and artificial intelligence (AI) play a significant role in improving these risk models. Alex shared, “With advancements in machine learning and AI, we now have the tools to improve risk assessment. Our wildfire models are based on physical parameters such as humidity, vegetation, topography, and wind patterns, allowing us to simulate wildfire spread and provide actionable insights.”

Climate Change: Causes and Consequences 

Addressing climate change is a complex challenge, and Alex emphasised the need to accept its reality, “Climate change is no longer a debate; it's a fact. The increase in global temperatures is evident. We've seen record-breaking temperatures, and it's directly linked to industrial activities.” 

One primary cause of climate change is the increase in carbon dioxide (CO2) emissions, primarily from industrial activities; however, Alex points out that addressing this issue isn't as simple as just reducing emissions. While emissions reduction is crucial, it's also essential to strike a balance between what can be emitted and what can be absorbed. 

Technologies that capture and store CO2 could contribute to a balanced approach. These technologies need time to develop and scale, however, the urgency of climate change requires immediate action. Alex remains cautiously optimistic about technology's role in mitigating climate change, stating, “While we face significant challenges, technology offers solutions. We need a combination of advancements in clean energy sources and innovations in carbon capture and removal. These technologies, alongside regulatory changes, can make a significant impact.” 

As the world grapples with the increasing impact of climate-related disasters, it's evident that technology, data, and regulatory frameworks will play pivotal roles in shaping our response to these challenges. By embracing innovation and adopting a proactive approach, we can work towards a more resilient and sustainable future in the face of climate change. 

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