Paul Fisher of the University of Cambridge Institute for Sustainability Leadership on why political leadership is crucial to making climate change a material risk for mainstream investors
In order to control climate change, a range of radical policies will have to be adopted by the world’s authorities – towns, cities, states, national governments and their agencies, and international organisations. The G20 and its related groupings have an important role to play in areas such as knowledge-transfer, coordination and sharing the burden.
This is especially the case when more and more investors are warning that the impacts of climate change on portfolios can no longer be ignored. The asset manager Schroders is the latest company to speak publicly about the escalating risks.
The work of the G20 Green Finance Study Group (GFSG), explicitly referenced in the G20’s communiqué in 2016, has continued this year, with the aim of bringing green finance into the mainstream of investment activities.
The most recent background paper on risk analysis, published at the end of the Hamburg G20 summit, identified the institutional and market barriers that still exist around green finance, as well as options for enhancing the ability of the financial system to mobilise private capital for green investment.
The report uses a number of case studies to demonstrate how environmental issues pose a material financial risk to businesses, and need to be treated as such. For example, a study by De Nederlandsche Bank surveyed relevant firms and found that almost 10% of the total assets for banks; 4.5% of assets for insurers; and more than 12% of assets for pension funds were currently exposed to fossil fuel and carbon-intensive industries.
One way to mitigate the risks from climate change is to make sure that investors have all the relevant information at their disposal. To achieve this, the paper stresses the importance of a broader range of consistent data being provided, the need for more policy certainty, and also greater collaboration between practitioners and academics to help financial firms develop and use tools to address the risks. A dialogue on environmental risk assessments could be promoted through networks, workshops, and conferences to help build the necessary capacity within the financial industry.
The University of Cambridge Institute for Sustainability Leadership (CISL) is a knowledge partner of the G20 Green Finance Study Group (GFSG) and a co-author of the background paper, alongside specialists from the Bank of England and the United Nations Environment Inquiry. It also acts as a convener of various industry groups.
CISL’s Centre for Sustainable Finance (CSF), which represents 50 financial institutions across five continents, has been at the heart of efforts to drive progress through its leadership groups of banks, insurers and other investment managers. These groups are working together to manage environmental risk and to identify and socialise new business opportunities, such as the possible "fintech" solutions being studied by a working group of CISL’s Banking Environment Initiative.
Irrespective of the political debates, financial firms increasingly recognise climate-related developments as a material financial risk and are beginning to manage them more appropriately. Given the urgent need for investors to be able to analyse the climate-related risks in their portfolios and take action on them, the CSF is encouraging its collaborating firms to develop common scenario planning tools relating to the disclosure of relevant financial information. The challenges include: policy risk; the absence of common methodologies; issues with data comparability and consistency; choice of time horizons; as well as industry-relevant scenarios.
Members of the CISL-supported insurance industry group, ClimateWise, have come together to commission research from universities and the private sector into ways the insurance industry can manage the "transition risks" and so support the transition to a zero-carbon, climate-resilient economy. Their ClimateWise Principles are a voluntary industry effort at documenting and disclosing members’ climate risk protection gap.
John Scott, a member who is also chief risk officer at Zurich Insurance Group, recently stressed that “the implementation of effective climate policy mechanisms and the regular monitoring of outcomes is vital for investors”, both in terms of their own investment performance but also in helping governments deliver their national commitments and priorities under the Paris climate agreement.
The Investment Leaders Group (ILG), another CISL-convened global network of 10 leading investment firms with approximately $4trn under management, has argued that investors should calculate and communicate the social and environmental impacts of their portfolios to the fiduciaries on whose behalf they invest. Will Oulton, an ILG member who is global head of responsible Investment at First State Investments, argues that this kind of analysis improves the understanding of how companies create value in the economy. He says “being aware of how these issues benefit or harm our investments is an integral part of serving our clients and is part of our fiduciary duty.”
This work, being carried out at industry and firm level, needs to be encouraged by national and international authorities to become truly transformative. The G20 collectively represents the lion’s share of the global economy and of global trade, not to mention two-thirds of the global population. Getting clear signals on the importance of green finance will help all financial businesses to make it mainstream in their everyday practice.
Paul Fisher is senior associate at the University of Cambridge Institute for Sustainability Leadership (CISL).green finance G20 ClimateWise Principles Schroders Investment Leaders Group insurance industry