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Beyond Ratings Weekly Digest

Your briefing on augmented financial risk analysis

N°125 ▪ 14th December 2017

 


ANALYST INSIGHT

Direct and indirect effects of wildfires in the United States

On December 11th, wildfires have consumed about 94,000 hectares in Ventura and Santa Barbara counties (South West California), poked by Santa Ana strong winds. California is experiencing its worst and most expensive wildfire season on record (9.1 million acres burned from January to November +71% compared to 2016), notably because of a very wet rainy season that provided all the necessary fuel. In addition to vegetation, about 800 structures and 680 homes have been destroyed so far (Reuters). Such a vigour is unexpected in December, as California’s wildfires season normally ends in October. Hereunder figure provides an overview of US wildfire history, in terms of fires number, surface area and suppression costs (source: National Interagency Fire Center). If burnt areas seem to be stabilized over the last 10 years, firefighting costs show a clear growing trend, which suggests that this stabilization is ensured at the expense of increasing fighting means. Compared to previous decades, it also appears that fire activity has significantly increased (although their number has been reduced).

 

 

 

 

 

 

 

 

 

 

In a 2016 article published in PNAS*, two researchers from the universities of Idaho and Columbia take a look at US Western forest fires and postulate that climate change is the cause of over half of the documented increases in fuel aridity since the 1970s, and that it doubled the cumulative forest fire area since 1984. As it is only the beginning, this would suggest an increasing fire risk in the coming years, with an environment that will be more and more favourable to wildfires. This should materialize, for instance, by an extended fire period.

Besides suppression costs, which almost reached $2 billion in 2016 and probably more than $2.4 billion this year, damage costs represent the main burden of wildfires. From the October fires, more than $9 billion in claims have been incurred by insurers for California only (Insurance Information Institute). Total damages could climb to $85 billion, according to AccuWeather. Verisk consultants estimate that 4.5 million of houses are exposed to high or extreme risk of wildfire in the United States, with more than 2 million in California (second is Texas, with more than 700,000 houses).

What are the effects of wildfires on biodiversity? It is important to know that fires are a natural and vital phenomenon in many ecosystems. Fires allow to maintain biological diversity by limiting the development of more dominant species. They open the canopy and allow the ground to be directly hit by sunlight, which is necessary for many species to proliferate. Some seeds (pyrophile plants) even require to be slightly burnt to germinate. Most plant communities in the Mediterranean Basin, for instance, are fire prone, and some ecosystems, such as the Mediterranean shrublands, are fire dependent. However, changes in frequencies as well as unsuitable management practices can become a threat for their survival. For example, some temperate forests in the US in which fire was deliberately suppressed for management and political reasons have experienced devastating wildfires due to an unnatural accumulation of fuel. On the contrary, too frequent fires can deeply modify ecosystems distribution, and degrade biotopes. In forests where fire is not a natural disturbance, impacts on biodiversity can be disastrous.

It should be reminded that forest fires are a significant source of GHG emissions. Moreover, about 90% of wildland fires are estimated to be caused by humans.

*Proceedings of the National Academy of Sciences of the United States of America (http://www.pnas.org/content/113/42/11770.abstract).

Hadrien Lantremange, Natural capital Specialist

 

 


WEEKLY FOOD FOR THOUGHT

Sovereign Risk

Goodbye Mrs. Yellen!

 

On Wednesday, December 13th, the Federal Reserve (Fed) raised, as expected, its fed funds rate by 25 bps to 1.50%. This was the fifth and last rate hike under Janet Yellen’s Presidency. Indeed, the current Fed Chairman, who succeeded Ben Bernanke in February 2014, will therefore make way for Jerome Powell next February.

“Janet Yellen has been a great strength of stability for the economy”. Everything is said in this sentence pronounced in early October by Christine Lagarde, the current Executive Director of the IMF. Indeed, during Janet Yellen’s tenure, the United States banking system regained its stability nearly 10 years after the global financial crisis. Moreover, the economy is at or near full employment in a context of moderate economic growth. However, inflation is still missing. Mrs. Yellen has shown wisdom and was patient, two essential qualities for a very hard task: exit an unconventional monetary policy, start raising fed funds rate and reducing the Fed’s balance sheet. She did the job, and she did it well. Goodbye Mrs. Yellen!

Source: Beyond Ratings

 

ESG

No country for old men…but for women?

Percentage of women in lower/single court

Wealth is usually considered as a key driver for most of ESG criteria and the richer a country is, the higher its ESG performance is supposed to be. But some indicators are exceptions of this rule and the share of women in parliament is one of them. For instance, in the top 10 countries, 3 of them come from Africa and 4 from Latina America. United States of America is ranked 101/193 behind Saudi Arabia (99) and Indonesia (100). Cultural aspects can’t obviously be brushed aside and explain a large part of the differences. It also appears that law highly contributes to parity especially for top leading countries. For instance, Bolivia requires all parties to alternate male and female candidates in their list explaining the almost parity (53% of women). For Rwanda, the 2003 new constitution decreed that 30% of parliamentary seats to be reserved for women and 14 years later, results largely exceed this threshold with a world record of 61%.

Sources: Beyond Ratings, Inter-parliamentary Union

 

Carbon/Climate Change

More than 40 countries have adopted carbon pricing policies

Carbon intensity of (estimated) ECB purchases

A recent event co-organized by De Nederlandsche Bank took place at the end of November to discuss “Central Banking and Green Finance”, gathering many researchers from academia, central banks, and other institutions. This took place in a context in which we see growing awareness of the need for “clear strategic policy signals and frameworks” (G20 2016 meeting in China), coupled with a strengthening perception that central banks should probably contribute to this momentum. Among the event’s key takeaways, you will find noteworthy research papers and interesting data as in the above graph, suggesting there is a strong potential to green the ECB’s asset purchases and thus support green finance. A shift in central banks practices would be very consistent with current trends. Mark Carney himself helped moving the financial sector following his famous speech on Breaking the tragedy of the horizon 2 years ago, and the 2012 Treaty of the Functioning of the EU states clearly that the ECB shall support the achievement of the Union’s objectives including “social progress, and a high level of protection and improvement of the quality of the environment” (Article 3).

GVA: gross value added

Notes: Size of the bubble indicates relative contribution to emissions in euro-area countries.

Sources: Beyond Ratings, Grantham Research Institute, LSE

 


MORE ON BEYOND RATINGS’ SOVEREIGN EXPERTISE

 


MORE RESEARCH

Recent Beyond Ratings Research Notes:

 

Read more Analysis on our website

 

 


© Beyond Ratings 2017

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Photo credit via Visualhunt/CC BY-SA or other: Front page ▪ Credit 1: CECAR – Climate and Ecosystems Change Adaptation R; Credit 2: Tony Webster; Credit 3: Kiefer.; Crédit 4: NASA Goddard Photo and Video / Research notes ▪ Credit 1: DnDavis (via Shutterstock.com); Credit 2: zhu difeng (via Fotolia); Credit 3: Mny-Jhee (via Fotolia); Credit 4: xmentoys (via Fotolia)

2018-03-06T15:27:32+00:00

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