346 AAssignmentsReading #7 BRT

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F O R R E S I L I E N C E

As the global financial system descended into crisis in 2008, the Canadian government appointed a forty- three- year- old finance of- ficial named Mark Carney to head its central bank, making him the youngest central bank governor of any major economy. Carney’s first mission was to enable his country to navigate some of the most turbulent waters in modern economic history. With a series of bold and well- timed policy moves, the governor helped Canada to emerge from the crisis relatively unscathed. Carney’s performance so impressed monetary authorities abroad that five years later, he was appointed governor of the central bank of a different country— the United Kingdom.

In some ways, Carney was an unusual pick to head the Bank of England. Raised in Canada, educated in the United States and Britain, married to a Briton, and holding Canadian, British, and Irish citizenships, the new governor had a more cosmopolitan background than his predecessors, going back to the central bank’s founding in 1694. With his penchant for creative thinking, some of Carney’s ideas were bound to be outside the box.

In September 2015, he gave an unusual speech in London to a group of tuxedoed insurance executives. Carney warned the

Building a Resilient Tomorrow: How to Prepare for the Coming Climate Disruption. Alice C. Hill and Leonardo Martinez-Diaz, Oxford University Press (2020). © Oxford University Press. DOI: 10.1093/oso/9780190909345.003.0004

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assembled crowd about a risk that central bankers had largely ignored but that kept him up at night. “Shifts in our climate bring potentially profound implications for insurers, financial stability, and the economy,” he said.1 Decision- makers in business and gov- ernment think and operate on time horizons that are too short to capture some of the worst impacts of climate change. This makes it hard to get a handle on the problem. Carney called this “the tragedy of the horizon”, and escaping it, one of the central challenges of our time.2

Carney’s proposed solution was seemingly simple: disclose cli- mate risk. Companies should disclose to the public what they know about the risks they face from climate change and how they plan to deal with them. These include the risk that policy and technology will shift quickly as the world tries to cut carbon emissions, upending a company’s business model. But they also include the risks that are the subject of this book— namely, the physical impacts from climate change that can disrupt businesses and entire economies.

As more and more information about climate risk becomes available to the public, Carney argued, the prices of all sorts of assets traded in markets— stocks, bonds, property— will shift to reflect the true risk of climate change. And as prices shift, so will behavior. In a world in which climate risk is plainly transparent to all, eve- ryone will be pressured to manage the risk and protect the value of their assets. Companies will abandon business models that generate high carbon emissions. Developers will stop building in flood zones. Investors will put their money only in companies that demonstrate they are serious about managing the risks posed by climate change. Market forces will work in favor of climate action and resilience on a large scale. That’s the theory, at least.

This chapter looks at how disclosure can make markets work for resilience and examines the challenges and dilemmas that this

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entails. We look at four markets in which we might expect climate risk disclosure to most readily cause prices to change. The markets are equities (company stocks), debt (bonds issued by compa- nies and governments), property (real estate), and insurance. The insights learned from these markets can illustrate how each could drive resilience on a large scale.

LEARNING TO LOVE DISCLOSURE (THE EQUITY MARKET)

Before the US stock market crashed in 1929, it resembled the Wild West. Wall Street operated like a rigged casino, a largely unregulated space with rampant fraud and abuse. Lack of disclosure was a big part of the problem. A former regulator described it this way: “Before the crash, stock prices often had little to do with the fundamentals, be- cause most of the fundamentals were never disclosed . . . Investors were sold securities without the benefit of a prospectus or offering circular; without ever seeing a balance sheet; without knowing the first thing about a company beyond its name and share price.”3

To build trust in the stock market, the US Congress passed the 1933 Truth in Securities Act and created the Securities and Exchange Commission. These measures changed the game, laying the foundation of a stock market based on disclosure— the notion that those selling stocks to the public must disclose “material” infor- mation, or information that is likely to change the perceived value of a security when it is known to the public.4 “Materiality” has served as a guiding light of American financial disclosure ever since, helping to cement widespread trust in the US capital market. Today, debates are raging about whether climate change and responses to it pose material risks to companies. For example, as the world moves to

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cut carbon emissions, companies whose business depends on high- carbon- emitting activities may soon find that their business models no longer work. Most importantly for our purposes, companies may find their operations, supply chains, and profits undermined by the effects of climate change.

That the extreme weather, sea- level rise, and other phenomena exacerbated by climate change pose material risks to companies is clear. Consider what happened to major corporations with op- erations in Thailand in 2011. That October, early in the monsoon season, a steady rain fell over northern Thailand. These rains grew to be one- and- a- half times more intense than normal. The Chao Phraya River system overflowed, and water reservoirs designed to contain the flooding breached their limits. Soon the waters reached seven industrial parks surrounding the capital city of Bangkok, which contained hundreds of factories belonging to eight hundred different companies, about half of them Japanese. Some of those factories housed producers of key auto components, such as power integrated circuits, audio and navigation systems, and transistors and condensers. The floods paralyzed production. Faced with a shortage of critical parts, the companies’ supply chains, which stretched from Thailand across Southeast Asia and beyond, seized up. It would take two months to pump the water out of all the flooded facilities. Some never reopened. Between them, Japan’s big three automakers— Toyota, Nissan, and Honda— experienced pro- duction losses of 420,000 cars, which cost them about $2.8 billion in operating profits.5

The electronics sector was also hit hard— especially the makers of hard disk drives. At the time, Thailand produced over 40 percent of the world’s hard disk drives, essential components in every per- sonal computer and handheld device. Western Digital Corporation alone, which produced one- third of the world’s hard disk drives

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in 2011, lost half its shipments in the flood. Factories owned by Toshiba, Samsung, and Seagate Technology cut production as well. As production dried up, a shockwave spread across the world’s computer market, and the prices of hard disk drives doubled and, in some cases, tripled. Computer manufacturers soon felt the cas- cading effect on their supply chains, prices, and profits.

Other industries are also at risk from climate change. The global shipping industry is vulnerable, as sea- level rise can render ports and warehouses inoperable.6 Software and data- management companies run the risk that superstorms will flood key data centers. Airlines face the prospect of having to cancel flights when high temperatures prevent their planes from taking off, and airports located at sea level could suffer from flooded runways. Banks holding lots of mortgages clustered in the same geographic area could suffer if many homeowners stopped making mortgage payments at the same time, because perennial flooding has made their homes valueless. The power- generation sector can get hit by water shortages; when there is not enough water to cool the turbines, power plants must shut down.7 Wildfires that damage electrical infrastructure can dis- rupt electricity transmission. Yet companies are still not disclosing these risks systematically and consistently to shareholders and the public at large.

To address this issue, a panel of business leaders came together in 2015 with the blessing of global financial regulators. The panel, known as the Task Force on Climate- Related Financial Disclosures (TCFD), offered sensible and seemingly simple advice.8 Companies should identify and disclose their climate risks. They should explain the impact such risks could have on their strategic direction and financial health. They should engage in scenario planning and dis- close how the business might fare under different climate scenarios.

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And they should explain what they intend to do about the risks (and climate- related opportunities) they have identified, assuming they find these to be material.

Some regulators and hundreds of business leaders applauded and endorsed the TCFD recommendations, but implementation ran into two major obstacles. First, assessing and describing phys- ical climate risk is a complex undertaking, especially if companies are to report in a comparable way. Those doing the disclosing need to agree on what to report and how to report it. How should compa- nies measure and report the risk of water stress, wildfires, or floods? What are the most appropriate indicators and time horizons to use in measuring the risk? What assumptions and scenarios should com- panies adopt when reporting? If they can’t agree and every company discloses using different metrics and assumptions, the market will not know what to do with the cacophony of information and will likely ignore it. Prices won’t shift, and behavior won’t change.

Fear is the second obstacle. As long as climate- risk disclosure remains voluntary, companies will worry about a “first- mover dis- advantage”— that is, that the market will punish those who disclose their climate risks first, putting them at a disadvantage relative to competitors who choose to stay silent. Some corporate leaders feel that it’s better to stay mum until regulators make climate- risk dis- closure mandatory. At the same time, they are working quietly to understand climate change risk, so that their companies can manage it more effectively and be ready if and when mandatory disclosure finally arrives. One banker at a private gathering in New York City in 2016 put it best: “If I were a corporation, I would be denying climate risk while preparing for it in secret.”

A related issue is legal liability. Corporate lawyers worry that if a company is found to have known about risks from climate change

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impacts but failed to report them, it will face liability for suppressing the information. Climate disclosure advocate Stan Dupré has talked to dozens of companies on both sides of the Atlantic about climate risk and has a good sense of the problem. Dupré typically starts exploring climate risk with a firm’s executives, and eventually the question of whether the company should disclose climate risk as part of its legally required financial disclosures arises. “The conver- sation starts with the legal team,” says Dupré, “and basically the an- swer we get usually is, ‘OK, if we start disclosing this risk and our competitors don’t, we will lose, so we won’t do it . . . Not only it won’t be reported [sic], but we should stop investigating this risk, otherwise we will lie to our investors.”9 This is hardly what Carney had in mind.

One solution is mandatory disclosure, which would force eve- ryone to disclose at the same time against the same standards. This would eliminate the fear of first- mover disadvantage, at least within a given country, and it would get the market and regulators accus- tomed to digesting this information and incorporating it into their decision- making. Europe is leading in this space. France has already mandated the disclosure of certain climate- related information. In 2018, the European Commission indicated that it will provide more guidance to companies on how to disclose climate- related in- formation in line with the TCFD recommendations.10 It launched a process that could mean that, before long, all major companies operating in Europe will have to disclose their climate risks. Making disclosure mandatory in other key economies, especially in the United States, Japan, and China, will be important to ensure that companies in places with looser disclosure requirements don’t benefit unfairly at the expense of those in countries with tougher disclosure rules.

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PAYING BACK IN A WARMING WORLD (THE BOND MARKET)

One spring day in 2015, the White House received a call from an anxious official in the city of Norfolk, Virginia. As we have seen, Norfolk is on the front lines when it comes to sea- level rise. The credit- rating agency Moody’s, which rates Norfolk’s bonds, had sent a detailed questionnaire to city hall. The message, reading between the lines, was clear. How, Moody’s wanted to know, does the city plan to address sea- level rise and recurrent flooding in the face of cli- mate change and still pay back its debts? Apparently, an article in the Washington Post had piqued Moody’s interest. The article reported that a plan commissioned by the city projected that protecting Norfolk from sea- level rise would cost $1 billion— almost the size of the city’s entire annual expenditure budget.11 Norfolk was not alone. Portsmouth, Hampton, and Virginia Beach, coastal cities in Virginia adjacent to Norfolk, received the same letter. The Norfolk official worried that Moody’s, concerned about the city’s creditwor- thiness, might downgrade the city’s bonds.

The official was right to be worried. Credit- rating agencies play a powerful role in the bond markets. Companies and governments issue bonds in order to borrow money from investors. The investors who buy the bonds expect bond issuers to repay the principal with interest over a certain period of time. Credit- rating agencies like Moody’s rate the likelihood that an issuer will be able to pay back its investors on time. If Moody’s downgraded Norfolk’s bonds, the market would likely see the city as a riskier bet and demand a higher interest rate to compensate for the higher risk. Norfolk would then find it more expensive to raise the money to pay for all kinds of things, including investments in resilience.

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It’s not just at- risk cities like Norfolk that worry about what climate change impacts could do to their ratings and borrowing costs. Many poor countries and small island nations are concerned that their exposure to climate risk has already pushed those costs higher, making it harder for them to finance much- needed resilience investments. A team of London- based researchers reckoned in 2018 that climate vulnerability has in fact pushed up borrowing costs for many developing countries. The researchers estimated that these countries pay, on average, about 1.17 percent more in interest based only on their climate vulnerability, which amounts to $40 billion in additional interest payments over the past decade on government- issued bonds alone.12

Yet despite the concern of officials in Norfolk and some de- veloping countries, credit- rating agencies have been slow to cap- ture climate risk. “Climate downgrades,” or situations in which a climate impact or climate risk has unambiguously led to a credit downgrade, are hard to spot. Sometimes, issuers continue to enjoy stable ratings for a long time in spite of escalating climate risk. Norfolk’s bonds remained stable long after the city official’s anx- ious call to the W hite House. And Miami, for example, continues to benefit from relatively low borrowing costs, which seems jarring considering the existential climate risks the city faces over a longer time horizon.

One reason why climate risk doesn’t show up clearly in credit ratings is that the ratings take into account many factors in addition to climate impacts. Another reason is that the time horizon of the ratings is too short— typically, five years at most— to capture the more severe impacts of climate change, which take longer to emerge. Sometimes, when a disaster hits a relatively well- off community, the rating agencies even see it as a positive development. “Some of these disasters— it’s going to sound callous and terrible— but they’re not

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credit- negative,” one senior credit- rating agency executive told the press. The communities “rebuild, and the new facilities are of higher quality and higher value than the old ones.”13 Communities might be better off after a disaster, sitting on top of more valuable assets that enhance their creditworthiness, at least until the next disaster strikes.

Precisely because credit ratings sometimes fail to capture cli- mate risk, some see an opportunity to make money. Hedge funds and other investors are using computer models (some of which we will discuss in chapter 5) to estimate which US municipalities will face relatively low climate risk in the future. Then they buy the bonds issued by those local governments. Because the market does not yet distinguish very well between the bonds of high- risk and low- risk municipalities, the hedge funds can gain an advantage and buy low- risk bonds relatively cheaply. Eventually, when mandatory disclosure or the forces of nature reveal to everyone the places that are more exposed to climate risk, the bonds of the low- risk munic- ipalities will rise in value, and those of the risky ones will sink. Hedge funds could then sell their lower- risk bonds at a premium and pocket the difference. At the same time, once the bond market wakes up to the reality of climate risk, the most vulnerable commu- nities will have to pay investors more to borrow money.

How should the Norfolks of the world react? They should use this time, before bond prices fully reflect climate risk, to develop a strong resilience plan and start implementing it right away. If com- panies, municipalities, and whole countries can demonstrate to the market that they have a plan and are putting measures in place to re- duce the risk, it should help differentiate them from peers who may be sticking their heads in the sand. Taking action now may protect their credit ratings and borrowing costs, helping them continue to make investments in resilience.

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PROPERTY AT FLOODED- BASEMENT PRICES (THE REAL- ESTATE MARKET)

The United States, along with Canada, Australia, France, and the United Kingdom, has one of the most transparent property markets in the world.14 Most US states require public disclosure of data on property prices, ownership, and sales. Technology has put that huge volume of data into the public’s handheld devices at no cost. Zillow, one of the largest real- estate search engines in the US, has 110 mil- lion properties in its database alone and nearly 200 million monthly visitors.15 Trulia, a search engine acquired by Zillow, developed a function that allows would- be homebuyers to layer property maps on top of maps showing historical data on hurricanes, wildfires, tor- nados, and floods. In theory, the real- estate- buying public should be more aware than ever about growing climate risks. In light of increased information, do we see climate resilience and vulnera- bility reflected in real estate prices yet?

In the United States, the answer is yes. Consider that pro- perty prices in the areas affected by Superstorm Sandy dropped between 6 percent and 16 percent, even for properties that were not directly damaged by the storm. Some worried that the price signal would fade along with memories of the storm. But four years later, economists could still pick up the price discount.16 A similar story emerges from nationwide data. Researchers looked at data from nearly a half million US property transactions and compared it with projected sea- level- rise data.17 Coastal properties exposed to projected sea- level rise sold at a discount of around 6 percent to 7.5 percent compared to similar properties that were not threat- ened by sea- level rise. The researchers also found that the discount was larger in places where public awareness of sea- level rise was higher. Similar results have emerged in the Netherlands, where

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property prices are 1 percent lower, on average, in places at risk of flooding, and the discount gets larger in neighborhoods with higher flood- level projections.18

Not only are buyers paying less for properties in flood zones, but evidence is beginning to mount that they are paying more for homes in locations perceived to be resilient. In Florida’s Miami- Dade County, researchers have found that the higher the elevation of single- family properties, the more rapidly their prices have appreci- ated. Also, the prices of properties located at sea level, and thus more likely to experience chronic flooding, have not kept up with the price appreciation of homes at higher elevations.19 As property buyers act on their perceptions of climate risk, they appear to be moving prices, and those prices, in turn, are signaling to others that they should think about climate- safer places when shopping for a home.

Some players in the real- estate market want to promote climate- risk awareness and are pressing for greater availability of informa- tion about risk. Zillow, for instance, is making its massive database of property transactions available to researchers studying climate risk.20 Also, some jurisdictions have made it mandatory for property owners to disclose flood risk when selling a property. In Miami- Dade County, local laws require that owners disclose to buyers in writing— in at least ten- point boldface type— if the property falls within a special flood- hazard area.21

Despite growing information about potential climate impacts to property, real- estate prices still don’t reflect the true underlying risk in many parts of the United States. Prices have not yet stopped developers from building luxury towers on potentially vulnerable coasts (Figure 3) and residential complexes in areas at extreme risk of wildfire, nor are they keeping customers from buying them. In post- Sandy New York City, new construction continues to go up in the areas that were the worst hit by the storm. As of 2018, there

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were over twelve thousand new apartments planned or under con- struction in the city’s worst flood zones; roughly one in eight new apartments in the city will sit in a high- risk flood zone.22

As we saw with the equity market, fear moves some to try to delay the day of reckoning. Property owners, municipal governments, and realtors all have something to lose from too much climate- risk transparency and from the wrenching shift in prices, profits, and taxes that will result from it. After Katrina, New Orleans, for example, lobbied the Federal Emergency Management Agency (FEMA) for seven years to change its flood maps and exclude many city properties from the high- risk area. And after FEMA revised New York City’s Flood Insurance Rate Map and added

Figure 3 Rendering of a new luxury tower in Miami, Florida.

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tens of thousands of properties to the “highest risk” category, city leaders lobbied hard to keep those properties out of that category, eventually with success. Nevertheless, it seems that property markets are waking up, faster than equity and bond markets, to the reality of climate risk.

THE COST OF PROTECTION (THE INSURANCE MARKET)

The fourth market we examine is the market for insurance, espe- cially property insurance. Everyone who owns property should want to buy protection in case their property suffers damage from water or fire. Insurance companies are happy to sell that protection for a price. That price reflects the likelihood that the property will suffer damage, to the best of the insurance company’s calculations. This is why insurance companies employ thousands of actuaries, whose job is to calculate probabilities and prices. Insurance buyers are of course free to shop around for the cheapest insurance rate. Homeowners with more resilient properties, or properties in areas with lower risk of climate- related extreme events, should pay less for their insurance than those who own riskier homes. In theory, the insurance market should be incentivizing resilience on a large scale.

Yet this does not always happen in the United States. The his- tory of flood insurance helps to explain why. Flooding is the most common and costly threat to property in the United States. In the 1960s, successive flooding events caused many private insurance companies to back away from selling flood insurance in certain parts of the country because they viewed it as too risky. In response, Congress created the National Flood Insurance Program (NFIP) in 1968 to provide affordable insurance to communities facing signif- icant risk of flooding. The NFIP is now the primary flood insurer

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in the United States. It provides insurance coverage for properties nationwide, including many that are highly vulnerable to flooding. Private insurance companies do not offer coverage for these vul- nerable properties in part because few property owners can afford the premiums. Instead, the NFIP sells insurance to some property owners at discounted prices, ultimately transferring the risk of losses to the federal government.

The NFIP wasn’t supposed to work this way. Originally, the gov- ernment intended for the NFIP premiums to reflect homeowners’ true flood risk. But to keep premiums low for certain groups, Congress overrode this principle and required the NFIP to charge different categories of homeowners less than the true risk would demand. As a result, for about 20 percent of NFIP policyholders, typically the ones in highest flood- risk areas, the program charges premiums that do not reflect the true risk. When those properties suffer damage, the federal government absorbs a good part of the cost, often repeatedly. As climate change exacerbates flooding from sea- level rise and extreme precipitation, this burden will likely bal- loon. At the time of this writing, the NFIP is over $20 billion in the red, even after Congress forgave $16 billion of its debt in 2017.23

Aware of the growing shortfalls, Congress has tinkered with the program over the years and, in 2012, it tried to put the NFIP on sounder financial footing. Congress passed legislation, with over- whelming bipartisan support, that eliminated subsidies and allowed the program’s insurance premiums to rise gradually over five years until they fully reflected the true risk to the insured properties. But once the bill was law, it became clear that the measure would trigger large premium increases for certain homeowners. Stories about these homeowners began to appear in the media. The New York Times, for example, wrote about a firefighter who expected his pre- mium to jump from under $500 a year to as high as $15,000 a year.24

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Public outrage erupted, and the political pressure on legislators became too much. Maxine Waters, one of the key sponsors of the reform, conceded to the press that, “[n] either Democrats nor Republicans envisioned [that the legislation] would reap the kind of harm and heartache that may result from the law going into effect.”25 In a spectacular reversal just two years after the original law passed, Congress approved, with equally overwhelming bipartisan support, new legislation that undid much of the reform. The new legislation repealed some provisions of the original law, grandfathered some of the NFIP subsidies, and ordered an 18 percent cap on annual pre- mium rate increases.

A key lesson from this debacle is that once governments subsi- dize insurance premiums to shield property owners from the true cost of their flood risk, it becomes very difficult to shift back to a free market in which the price of insurance fully reflects the risk. If there is an attempt to do this, it cannot be done abruptly. The British gov- ernment applied this lesson in 2016, when it introduced Flood Re, a system that subsidizes the flood- insurance premiums of property owners in flood- prone areas. Crucially, the system is set to expire in twenty- five years, at which point the subsidy will end. This time- line gives homeowners a transition period to put in place resilience measures and prepare for the day when premiums fully reflect the risk. At the same time, the system does not offer insurance coverage for new properties, so if developers want to build in risky areas, they bear the full risk of doing so. The United States and other countries should consider adopting a similar approach.

W hat about risks the private market currently insures against that will be amplified by climate change? Take the risk of wildfires, for instance. Of the millions of California homes in the wildland- urban interface, one million are rated at high or very high risk of wildfire. Reeling from several years of epic wildfire losses, private

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insurers have increased fire- insurance premiums in California, and some have considered pulling out of the market altogether. W hen private insurance dries up, homeowners can turn to California’s Fair Access to Insurance Plan (FAIR Plan), a state- mandated insurance pool created after brushfires in the 1960s made insurance hard to obtain. The plan is run by private insurers for homeowners who cannot get insurance elsewhere. “The FAIR Plan is the canary in the coalmine,” said California Insurance Commissioner Dave Jones in 2018. “If you see their numbers begin to go up dramatically, that tells us people are not able to find private insurance, and it tells us the private insurers are re- ally pulling back.”26 As the number of homeowners covered by the FAIR Plan grows, it’s not clear how long private insurers will be willing to continue to participate without the government stepping in to shoulder some of the risk. Then the prospect of another costly NFIP- like arrangement, this time for wildfire risk, will grow more and more probable.

One way to make insurance markets work for resilience involves strengthening standards and practices. Several nonprofits in the United States are developing building- safety standards that can de- monstrably reduce the risk of damage to a property. If a homeowner meets the standard by undertking retrofits and upgrades, and an in- dependent authority can verify that the property does in fact meet the standard, then insurers may be willing to lower their insurance premiums. The property owner can use some of the insurance sav- ings to pay back loans used to pay for the upgrades.

For example, a corporation that operates in several states called MyStrongHome encourages homeowners to upgrade their prop- erties to meet extreme- weather resilience standards. A nonprofit organization called the Insurance Institute for Business and Home Safety (IBHS) develops safety standards based on research it

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conducts in a unique facility in South Carolina, where its experts test different protective technologies. In its hangar- sized labora- tory, IBHS can subject one and two- story model homes to sim- ulated hurricane- force winds, extreme rainfall, and even ember showers. Once MyStrongHome certifies that a structure meets IBHS standards, participating insurance companies offer the owner a discounted premium on his or her policy. A program in Colorado called Wildfire Partners has done something similar. It has devel- oped standards and best practices for protecting buildings from wildfires, and it certifies homes that comply with those standards and practices.27

These efforts, however, have struggled to reach mass scale. Wildfire Partners certified less than a thousand homes in Colorado between 2014 and 2019. And in Alabama, the state with the most IBHS- compliant homes, only seven thousand houses were certi- fied between 2013 and 2018.28 One reason is that some insurers balk at the prospect of tying their insurance coverage decisions to standards.

In California, for example, regulators have tried to replicate the Wildfire Partners program, but it has proven difficult to recruit insur- ance companies to participate. According to Dave Jones, the insur- ance companies worry that if a resilience standard emerges and they lend their support to it, then regulators might eventually force them to cover everyone who meets the standard. They prefer to decide whom to cover and whom to drop on a case- by- case basis, and they do not welcome the loss of discretion, even if the outcome would be good for the state and the homeowner.29 Yet the standards- led ap- proach remains promising as a science- based, market- driven way to promote resilience on a large scale. Regulators and state legislatures may eventually have to get involved to encourage insurers to join the effort.

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As our review of the four markets suggests, climate risk disclo- sure can act as a powerful and transformative force, one that can propel climate resilience at a systemic level. But transparency can also prove highly disruptive. In all four markets, fear of disruption and its consequences has led different groups to throw sand into the gears to delay the day of reckoning. But that day is coming, as the impacts of climate change will eventually expose the companies, municipalities, homes, and countries that run the highest risk.

As that process unfolds, if there have been no efforts to prepare, investors, banks, and insurance companies could panic and pull back indiscriminately from parts of their respective markets. Investors and financial- services companies could opt to dump shares, bonds, property, and insurance customers, motivated more by panic than by an accurate understanding of actual risks, causing widespread economic harm. A smarter way forward is for financial regulators to work with the private sector to lay out a gradual but firm path toward mandatory disclosure and clear standards. This will give people time to put resilience measures in place and teach the market how to make more discerning choices between those who manage climate risk prudently and those who prefer to ignore it.

PRESCRIPTIONS AND PROVOCATIONS

• Financial regulators, in close consultation with the private sector, should put in place mandatory requirements for dis- closing the climate risk of publicly listed companies.

• Business leaders should lead a process to develop an authori- tative protocol that enables companies to understand and re- port material climate risks in a comparable, standardized way.

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• The US Congress should reform the National Flood Insurance Program by phasing out subsidies over an appropriate transi- tion period, excluding new development in floodplains from coverage, and terminating coverage for properties that have flooded repeatedly, all while providing adequate assistance to affected homeowners, especially low- income households.

• Insurers in the United States should offer premium reductions to property- owners and communities that invest in verifiable risk- reduction measures and meet higher building standards.

• State governments should provide property- tax breaks to owners who retrofit their homes or small businesses for greater resilience and comply with the latest model building standards. Federal, state, and local government grants should be provided to homeowners for incorporating approved resil- ience measures.