London scoping - ukcip

7.6 Financial Services
Final Report
176
7.6.1 Context
The financial services sector is the largest employer in London (32% of total), and excluding the
insurance industry, employs about 700,000. Professional and support services such as legal
services, accounting and management consulting employ a further 600,000 people. The draft
London Plan envisages the protection and enhancement of this sector as a principal mechanism
by which London’s economic development can be driven, and by which London’s status as a
global city can be maintained.
7.6.2 Flooding and Rainfall Intensity Impacts
Much of the discussion on climate event risk changes and their repercussions for the insurance
sector are relevant to the wider financial service sector in London because of the inter-linking of
insurance and capital markets. Figure 7.2 below illustrates the extent of these linkages.
As an example of the linking mechanisms, the case of lending can be cited (IPCC, 2001). Most
private and corporate loans are secured by property. If a region such as London becomes more
exposed to climate-related natural disasters such as floods or windstorms, the prices for property
could fall - which may result in a loss of confidence in the local economy and may trigger a
credit crunch of the sort described in the section on insurance. An indirect consequence of this
is that other types of business such as management of private assets and granting of private
loans that are not backed by property will also be affected (Bender, 1991; Thompson, 1996).
7.6.3 General Climate Change Impacts
There are divergent views on how the banking sector will be impacted by climate change. One
view is that the nature of the industry - large, diversified banking institutions - means that any
loan exposure will be minimal since no substantial portion of the loan will be kept for any long
period. Alternatively, should their customers operations or financial circumstances change as a
result of climate change, (e.g. international tourism), the banks performance could be affected
indirectly.
The stakeholder consultation did, however, identify a strong feeling that the risk management of
potential climate change impacts, coupled with the implementation of regulatory regimes for
greenhouse gas emission mitigation, provide significant business opportunities. Risk
management is resulting in the development of markets for e.g. catastrophe bonds and weather -
related trading in the international financial markets.
Similarly, the reality of a carbon-constrained future for all business is already manifesting itself
in the application of energy-focussed audit work for consultancies as energy use becomes a part
of companies’ business strategy. There is likely to be a major verification role as Kyoto
Protocol regulatory mechanisms such as Joint Implementation and Clean Development
Mechanism are enforced. Finally, there is a developing market in carbon trading which London
is in a very good position to exploit as an established trading centre. It was noted by one
stakeholder, however, that Chicago currently lead the way in this market, benefiting from the
fact that the US are likely to be the major buyers of carbon credits in future! All these
opportunities for mitigation are likely to be enhanced as the recognition of potential climate