TELESTO STRATEGY

Board series: Confronting our climate reality – LA fires

JANUARY 2025

Uncontrolled wildfires continue to menace and destroy communities in Los Angeles under a rare red flag warning. Even with the deadly fires still raging across a large swath of Southern California, the estimated damages have made the fires the region’s worst natural disaster in decades. The issues mount – lack of water, cascading electrical outages, un-insurability, privatization of first responder support, finger pointing between local, state, and federal levels. With all of this in mind, the LA fires demonstrate a new vulnerability for Americans. Residents and business leaders alike must call into question closely held assumptions on normalcy in one of the biggest and most prosperous U.S. cities.

Key Takeaways:

  • Climate change is here. Although debate has persisted on the origin and materiality of climate change, the LA fires demonstrate the increased vulnerability of large swaths of the U.S. to devasting climate shocks
  • Immediate corporate impact. The severity of damage caused by the fire requires a deep assessment from corporate boards on consequences for their organization, employees, communities, and asset portfolios (tangible and intangible) and how they operate in high-risk environments
  • Five signposts. As the fires continue to rage, five intractable signposts have emerged for businesses to reconsider – (i) recession of residential insurance coverage, (ii) connectivity of physical risks and public infrastructure, (iii) privatization of first responders and disaster relief, (iv) climate migration, and (v) political hostility across local, state, and federal layers
  • Climate risk assessment. As part of their duty of care and fiduciary responsibilities, corporate directors will have to push for enhanced climate risk analysis and disclosures
  • Trillions in assets at risk. Companies in the S&P 500 Index own physical assets across 68 countries globally—and 60% of these entities (with a market cap. of $18 trillion) hold assets that are at high risk of at least one type of climate-change physical risk

Although still unresolved, the LA fires have shined a harrowing light on structural and systemic climate-related issues that will persist. These issues pertain to urban and vulnerable populations, businesses, policymakers, city and state governments, insurance companies and will intensify years to come.  As the crisis evolves, we have identified key signposts for all boards to consider:

  1. Insurability: The residential insurance market has receded and will continue to recede – what was insurable a year ago is now uninsurable. Individuals, families, and businesses should alter their assumptions on what will be an insurable risk post-LA fires. California’s $10 trillion residential property market will be challenged and re-evaluated. Last year, State Farm dropped nearly 70% of its customers in Pacific Palisades, where houses are not separated by brush, but stacked. By 2024, the state’s insurer-of-last-resort program had reached $3 billion in exposure, seven times as much as 2020. As of early January 2025, the FAIR Plan had just $377 million available to pay claims, according to the office of Senator Alex Padilla. The total insured losses so far has been as much as $30 billion

Why it matters → For companies who either have their locations, employees, or suppliers located in vulnerable areas to climate shock, the disruption to the insurance market means an alteration of the viability for many to live as they were. Climate risks, both physical and transition, will need to be governed at the highest levels of an organization. Insurance policies protecting physical assets in climate-vulnerable locations will not be as affordable nor available. Furthermore, local governments desperate for financial relief, may turn to climate litigation to sue responsible parties, which would include corporate polluters

  1. Physical climate risks are interconnected – uncontrolled wildfires result in damages to residential and commercial property, alongside failure of critical infrastructure (e.g., water, electrical). As first responders ran to danger, they were ill-equipped to suppress or contain the structural fires. In many instances, reports have identified homes that were destroyed simply because there wasn’t enough water to put out the fires. As of Monday, January 13, a lawsuit was filed against the Los Angeles Department of Water and Power and accuses the public of failing to properly manage water supplies critical to fighting the deadly Palisades fire. Similarly, a group of residents and business owners sued Southern California Edison over the Eaton Fire, which has not yet subsided in Pasadena

Why it matters As more climate shocks devastate populations across the U.S. (and globally), more and more litigation will emerge as defendants look to recoup loss and damages. Public utilities, companies managing critical infrastructure, and supply chains will be closely monitored and frequently litigated. For companies to assess their true risk portfolio, they must understand the inherent linkage between cascading failures of services and infrastructure and their potential liability

  1. Demand for privatized first-responder and disaster relief will increase, alongside more regulation of these services. Local demand for first responders rapidly outpaced the supply of trained, equipped, and available firefighters, EMTs, police officers, and more. Hiring a private fire crew costs thousands of dollars a day, and most work through government contracts or with insurance companies. On an increasing basis in fire-prone areas, wealthy property owners are calling them in directly. As LA residents and leaders grapple with the devastation, a central question is whether the city and county fire departments could have enlisted additional firefighters more quickly, and whether such a faster mobilization would have kept the fires from spreading so rapidly

Why it matters → As continued demand for emergency response for residential and business property will intensify, businesses will have to negotiate the balance between preparation for greater climate shocks as well as the public backlash. Moreover, in fire-prone areas, expect additional regulations that require contract firefighters (and first responders) to coordinate with public fire agencies’ incident commanders during wildfires. In California, the law prohibits them from driving vehicles bearing insignia suggesting that they are public emergency personnel and from using emergency lights or sirens

  1. Climate migration is not an issue of the future, it’s here and now. Certain U.S. cities will face worsening and recurring climate disasters – companies will need to reassess risk and often relocate – Houston, Miami, Tampa, New Orleans, Los Angeles, San Francisco. In the case of LA and other areas, wildfire risk is intensifying due to a number of conditions. Rising temperatures, primarily caused by the burning of fossil fuels, bring prolonged heatwaves, deeper droughts, reduced soil moisture, and drier vegetation. It is too early to say, but many who won’t be able to afford to rebuild are likely to leave LA or California to safer ground. People in the U.S. and around the world are now routinely fleeing their homes to escape the risks of global warming. Leading researchers expect significant movements in the U.S. away from the coasts and towards the Midwest and North

Why it matters → Climate risk is ultimately financial risk. To be successful in high-risk geographies will require an understanding of local resilience plans, destination cities, and critical infrastructure to support migratory populations. The fabric of the U.S. employment base will change as does the availability of homeowners insurance, manageability of cost of living, infrastructural resilience, and more. Corporate boards should look to understand where these trends are leading domestic populations and how to match their business operations and supply chains accordingly. Where people go is where business will have to follow

  1. Finger-pointing will be directed up and down layers of government. Under a Republican trifecta and Trump’s aggressive style and an influx of misinformation, expect increasing clashes between local, state, and federal policymakers and political leaders.

Why it matters → As the crisis continues to evolve in Los Angeles, political leaders at every level are looking to displace blame and accountability. While disappointing and chaotic, business leaders must have an improved understanding of conflict regulatory priorities between States like California and the emerging platform of Trump 2.0. As Trump’s policies are expected to be unfriendly to climate protection, mitigation, and resilience, corporate boards will have to have a very deep understanding of the regulatory layers in climate-risk prone geographies

Actions boards can take:

  • Call for full physical and transition-risk climate assessment in accordance with TCFD/IFRS standards, ask for a deep-dive presentation from management of most material risks to the enterprise and mitigation strategies
  • Better understand employees impact by the climate shock and evaluate opportunities to extend logistical, emotional, and financial support
  • In anticipating of the next LA-like climate shock, identify vulnerable employee populations in other high-risk cities that expect climate shocks of equal or greater magnitude
  • Evaluate insurance policies enterprise wide and determine opportunities to enhance process, controls, SOPs to better internally manage enterprise risk

Questions for the boardroom:

  • Where do we have physical operations and employee bases in cities most vulnerable for climate shocks?
  • How has the insurance policy and premium on our physical assets changed over the past year? What is forecasted to change over the next 2-5 years?
  • What have we identified as the greatest climate risks to our business over the short-, medium-, and long-term?
  • How will Trump’s policies assist or complicate the mitigation future climate risks to our enterprise’s business continuity?

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