Analyzing the European climate service demand - drivers of adaptation and recommendations

By Richard Bater

Climate change results in specific and uneven impacts that are dependent on the sensitivities of each sector and asset. Moreover, the risks associated with climate change raise implications throughout sector value chains and across asset lifecycles, from planning and design to commodity pricing and trading. The interconnected, geographically dispersed nature of much of today’s economic activity means that climate risks can rapidly cascade through global value chains, transforming and transmitting physical risks in one place into material, liability and other risks in other places.

The MARCO (MArket Research for a Climate services Observatory) project assesses the vulnerabilities and needs of different climate service markets, and the conditions that could enable the market to flourish in future. The overriding purpose of this analysis is to help climate-proof Europe through addressing gaps and vulnerabilities in Europe’s capacity to adjust to a new climate reality, and guide development of climate services that better meet these needs. 

In partnership with LGi, Acclimatise has led a multi-national consortium to undertake deep-dive studies regarding demand for climate services for a range of sectors and regions across Europe. This work has resulted in a method for conducting risk-based market analysis of demand for climate services that can be replicated in any sector or region. Drawing on the insights of more than one hundred stakeholders, the sectors analysed by the project span Copenhagen real estate to Austrian alpine winter tourism, and also includes the first integrated analysis of the implications of climate change for legal services and its potential demand for climate-related information. Collectively, the sectors and regions covered by the studies account for €247.9bn of economic output and support 2.25 million jobs. 

Key results

It is shown that decreasing precipitation and higher maximum temperatures pose a risk the greatest number of sectors and regions studied. It is essential to note, however, that physical exposure and vulnerability to hazards are only one indicator of potential demand; compliance-driven climate risk disclosure obligations are likely to result in more generalised uptake of services catering to such needs.

Across sectors, the studies highlight two important lapses in governance that lead to climate risks being unmanaged. First, users often demonstrate a ‘proximity bias’; a tendency to attend to near-term risks or base decisions on historical experience, rather than on an awareness of risks expected to materialise now and in future. This can result in climate risk being viewed as a discrete, ‘horizon’ issue to be dealt with later, rather than a stressor of today’s risks that calls to be dealt with sooner. 

This can give rise to at least three challenges. First, the unevenly felt and – with time – diminishing influence of climate events of decision making means that risks may lack systematic solutions, and may quickly slip down the agenda as other priorities come to the fore. Second, an absence of either experience of extreme climate events or legal duties to manage risks can result in latent risks being unmanaged and opportunities unexploited. Third, in either case chronic climate risks may be left entirely unexamined and unmanaged, despite these potentially resulting in higher liabilities being accrued in the long term. 

Second, an absence of clear responsibility for managing climate risks, particularly in sectors typified by long or complex value chains, can result in risks to people or property being left unclaimed and therefore unmanaged. This can ultimately increase aggregate net risk to asset owners, reinsurers, and wider society.

Other key findings include:

• Sectors best served by climate services are: water, energy, agriculture, urban planning, education, and forestry. These sectors tend to be ‘strategic’ or well provisioned by existing weather service providers.
• Overall is a very low level of demand-side awareness of what climate services are, the benefits they may bring, or where they may be sought.
• Far-sighted organisations are recognising that addressing climate change can help – rather than hinder – the realisation of existing strategic goals.
• Studies identify several drivers of climate service use, as shown in the table below:

Why adapt?

• Contribute to building the resilience of communities and ecosystems 
• Optimised risk pricing
• Ensure resilience of operations, products, and services 
• Reduce the cost of material inputs 
• Ensure business continuity and realisation of strategic goals 
• Bolster credit worthiness, investor appeal, and insurability 
• Mitigate liability risks
• Enhance intangible/reputational value 
• No-/low-regret adaptation fortifies organisation 
• Exploit emerging opportunities

Despite these advantages, across sectors the studies show that organisations are more likely to produce climate services and be ahead on building resilience if have one or more of the following attributes:

• They have a long-term investment in their organisation or project; 
• They have direct experience of dealing with the impacts of climate hazards; 
• They own or operate large-scale fixed assets, often strategic in nature; 
• The public sector has a stake in the organisation, resulting that public policy priorities are brought to bear on an organisation’s governance and planning.

Future

The market for climate services is in a state of flux, with evolving soft and hard regulatory frameworks driving demand for new types of climate services from new sectors:

1. The EU High Level Expert Group on Sustainable Finance, the European Pensions Directive IORP II, and the Finance Stability Board’s Taskforce on Climate-related Financial Disclosuresbringing about change in the regulatory environment;
2. Directors’, trustees’, and professional duties are evolving in light in respect of climate related liability;
3. Climate change is increasingly viewed as a material financial risk and C-suite issue, as investors and others increasing expect to know the extent of corporate exposure to climate risks and the steps being taken to manage those risks;
4. Increasing understanding of the material and reputational benefits of building resilience, such as improved operational performance over asset lifecycles and better managing investments in higher-risk assets (both transition and physical risk).

MARCO’s sector studies identified several recommendations to strengthen and harmonise the resilience building effort across Europe as well as better guide the climate services sector develop and scale advanced climate services that meet user needs:

• Legislate for a clear, comprehensive, and harmonised legal framework for climate resilience that bring forward the time horizon for action on climate-related risk;
• Design or upgrade plans, rule and standards that activate the framework at sectoral and regional levels in a coordinated but differentiated fashion;
• Increase awareness – on both the demand and supply sides – about climate impacts at the level of specific sectors and regions;
• Implement climate resilience strategies and measures at the level of each organisation;
• Delineate responsibility for climate change adaptation or mitigation at the level of each organisation or project;
• Continue optimise climate services that meet the specific needs of end users;
• Climate services should be demand-driven whilst being science-based. Prospective users are sensitive to the reliability and credibility of climate services, therefore appropriate quality assurance should be considered (e.g. professional charters).

Sectors covered:

• Real estate (Denmark)
• Mining (Europe)
• Legal services (UK / global)
• Renewable energy (Denmark)
• Critical energy infrastructure (Germany)
• Water infrastructure (Spain)
• Urban infrastructure (Germany)
• Agriculture and forestry (France)
• Winter tourism (Austria)