Businesses are being asked to measure their financial risk of climate-related change. But no one seems to know how
In October 2018, Ron Dembo was driving through an area of burned forest in Northern California. The CEO and founder of Toronto-based Riskthinking, ai, Dembo had been invited to give a keynote speech at the conference of the California Independent System Operator (CAISO), one of the world's largest electricity distributors. Dembo had previously built Algorithmics Inc., which became the world's largest enterprise risk management software provider. He was headed to the conference to discuss a new kind of "risk thinking" that he believes could supplant existing forecasting strategies.
"Every decision we make today affects our future," Dembo says. "Yet, whether we are a corporation or an individual, our decision-making today is primarily guided by our attempts to forecast our future. Traditional forecasting doesn't work well, because past data is of minor use in our fast-changing climate reality. Nearly every commercial and non-commercial sector--from finance, insurance, energy and transportation to local and federal municipalities--is affected."
Conference organizers in California initially asked Dembo to avoid mentioning climate change, a request that was rescinded only after two months of haggling. As he drove through the burned forest on his way to the conference, he saw that work crews from Pacific Gas & Electric (PG&E), the state's biggest utility, were installing new transformers in the same forests that had just burned down and in the same spots where they'd been previously installed--that is, the same forests that were prone to drought and fire, often caused by sparking transformers.
During his talk, Dembo showed a map of California with locations of transmission wires and transformers and how this is exactly where scientific anal ysis would predict fires to occur. The nature of a risk-thinking solution would be to hedge possible future events. "There is a need to replace forecasting with risk thinking," Dembo says, "and to compare risk under alternative, forward-looking strategies and across institutions, stress-testing decisions under a well-defined and consistent set of scenarios."
For example, if there were a likelihood of strong winds coupled with drought and extreme heat at some point in the future, PG&E would know that this could lead to one of its transformers igniting a significant fire. Many of the transformers pass through forests susceptible to fire...