What will it take to convince the world that we are on the brink?
How many more scenes of devastation and destruction will it take to persuade us of the impending reality of a possibly unlivable planet, caused by extreme weather events?
Whether it be the record temperatures and recent wildfires in the northwest of the USA, the devastating floods in Germany or the terrifying scenes of subway riders in China, literally up to their necks in floodwater, what is clear is that these events are happening more frequently and with greater intensity. And that frequency and intensity is anticipated to accelerate over the next several years.
For quite some time now, scientists have been sounding the alarm that this would happen, however some are now suggesting that this is happening faster than initially predicted.
Much has been written about these events and our collective response to them. Will these events help convince the world that we really are on the brink?
The sceptic in me likens this to the scenes immediately following one of the regular, horrific, mass-shootings in the USA, where you see the airwaves jammed with politicians offering platitudes and political gestures which invariably result in zero progress. However, the optimist in me believes that we collectively have the know-how, we have the resources and, if we choose to, we can approach this challenge with the great focus, urgency and speed needed.
We already have our burning platform. We just need everyone to understand how quickly it is burning, and how each of us can help.
There is a growing awareness and concern around the world of the increasing frequency and intensity of these climate-related extreme events, and those concerns are coming not only from the millennial population. Will countries, continents, global leaders, and international bodies and institutions step up and demonstrate the commitment and urgency to address this challenge?
This will be the test of our time.
When John Kerry spoke recently in London, he uttered probably the most profound words to date on the subject, appropriately characterising the current situation as “the world’s current mutual suicide pact.”.
John Kerry: “Everything the scientists have been telling us now will happen in 30 years, is happening – but bigger and faster than was predicted.”
What Is The World Doing About Climate Change?
As we locked-down to protect ourselves against a ravaging, global epidemic, it is no coincidence that awareness and concern about climate change increased.
Climate-change dialogue has evolved. Politicians in the main, are accepting the science behind it, and it most certainly holds its place high on the agendas of the G7, the G20, their member states, and their respective regulatory bodies.
Global leaders have rightfully identified the finance industry as being one of the key instruments in addressing the urgency and criticality of the situation and avert the dire prospect of an increasingly unlivable planet. The global financial industry is ideally placed to ensure that finance flows are aligned with the Paris agreement of limiting temperature rise to 1.5 degrees Celsius.
For a country, region or city, at a macro-economic level, these extreme climate-related events can cause mayhem with their local finances. They can result in higher infrastructure and repair costs, lower tax revenues, and possibly higher borrowing costs. They can also impact multiple dimensions of a country’s risk profile (credit risk, market risk, liquidity risk, reputational risk), which in turn could lead to capital depreciation, price shocks in the form of inflation and other nasty surprises.
Why The Global Financial Industry Is Critical In Managing Climate-related Risks
The Global Financial Industry is a network of financial institutions such as banks, insurance companies, stock exchanges, and investment houses and includes regulators, ministries of finance, central banks, securities market regulators, and banking and insurance supervisors.
At their core, the financial markets provide for the exchange of current income for future income and the transformation of savings into investment so that production, employment, and income can grow, and living standards improve. Key functions of the global financial system will typically include savings, wealth, liquidity, risk, credit, payment, and fiscal policy.
Through the financial system, investors provide capital to fund projects and receive a return on their investments. Part of this process involves a careful and considered risk assessment.
Key Participants in the Global Financial Industry
The global financial system is critical in managing climate change for several reasons. Firstly, the financial system touches every business in every sector in some way. For example, it can provide insight into which banks are funding companies operating in high GHG emission industries, and which companies have investments, holdings or partnerships in GHG sensitive industries, and which insurers are underwriting or investing in companies that are exposed to climate-related risks, whether they be physical, transitional or liability risks.
These institutions, as participants in the global financial system, are uniquely placed to identify, control, manage, and record climate-related risks.
Central banks, regulators and supervisors also play a key role in the global financial system. As climate-related risks represent a financial risk, central banks and supervisors need to ensure that the financial system is resilient to these risks.
And for the banks, insurers and other entities and institutions regulated by them, they themselves must also be climate-resilient.
Climate-Related Risks
Consider one of the german towns recently devastated by the catastrophic floods. Banks will invariably have provided loans to businesses and consumers in the area. Insurance companies will most likely have underwritten policies for businesses and consumers in the local area. Asset owners most likely will have had assets located in the impacted areas – assets that were either completely destroyed or whose value has been temporarily or permanently reduced.
Now for example, imagine if your pension had been invested in a company or companies that were significantly exposed to climate-related risks such as those in the Germany example. Surely, you would want to know about this in advance and to have the option to decide how you invest. Surely, the company investing your money has an obligation and responsibility to disclose the nature of these risks and the possible implications of them.
This is one of the key directives of the G20 – that material climate-related risks be disclosed in a comparable, consistent and decision-useful manner so that investors have clear visibility about where their money is invested.
Much progress has been already been achieved in promoting climate-related disclosures. Through the global leadership of the G20 and the Financial Stability Board (FSB), the Task Force on Climate-related Finance Disclosure (TCFD) was formed to develop a framework to help organizations disclose their climate-related financial risks.
This framework was delivered in 2017 and covers all organizations, and provides a tailored framework for some of the key sectors within the Financial Industry addressing some of the questions pertinent to that industry. For example:
- Banks: Do they have appropriate insight into the GHG emissions they are financing through their loan portfolios? Do they understand their customers’ transition risks?
- Insurers: Do they have insight into the physical and transition risks related to the policies they are underwriting for businesses?
- Asset Owners: Do they have visibility into the climate-related risks in their portfolio holdings? Prior to an acquisition, do they fully understand the climate-related risks of the business they are acquiring?
- Asset Managers: Does your board engage on climate-related issues? Have climate-related risks been integrated into the overall enterprise risk analysis?
The global nature of the climate challenges, combined with the tightly interconnected nature of the related financial risks, demands a tightly coordinated and global response.
Stay tuned as we will revisit how some of the Finance Industry sub-sectors play a critical role in addressing climate change over the next couple of blogs.
Back To Climate Change...
For every one of these once-in-a-lifetime wildfires, devastating floods, rising record global temperatures, increased rainfall or sunshine, again we find ourselves asking the question… What will it take to convince the world that when it comes to climate change, the moment is now?
And now, we have raging fires in Turkey and Greece!
The next several months are very important in the climate-change calendar. NDCs (nationally declared commitments) representing the commitments to reducing emissions made by countries and organizations, should be issued in August. COP26 will be held in November and in between there will be a flurry of much-needed activity around issuance of standards, definitions and regulations. This is in addition to much of the terrific work that has recently come from the FSB, the Global Climate Action from the UN Climate Change and other august bodies.
It may be a touch optimistic, but we could close out 2021 with a much better understanding of who has stepped-up to help move the world back from the precipice, and more importantly, what needs to be done to secure planet earth for future generations.
