What is a climate-related financial risk?
Continuing to create emissions at this rate WILL cost us money. At a change of +3.2°C above pre-industrial temperature levels by mid-century, we would certainly experience rising sea levels, temperature extremes, and more frequent & harsher storms globally. This would result in displaced lives, livelihoods, and communities, with clear economic consequences. In this scenario, the global economy would be 18% smaller than in a world without warming. Unfortunately, short term spending will drastically cut into the longterm expenditures that would accumulate - meaning that the financial risk lies in waiting around to see how much warming actually occurs. Climate action is the inexpensive option.
Where should we be investing?
The most obvious answer to this question comes from asking what should we NOT spend money on? Our best bet to decrease the effects of climate change is to engage in drastic reductions to atmospheric greenhouse gases and aim for net zero emissions by 2050. So this means, spending less money on high emitting practices.
Sounds simple enough! Except that population growth and resource requirements are exacerbating demand and we are not transitioning to low emissions options fast enough to keep pace. Various financial levers are now being experimented with in order to deter investment into carbon-intensive practices. As a result, banks are being held to a higher degree of scrutiny when it comes to where they are making their lending dollars available (and how much emissions are being created as a result).
Should I divest from carbon-intensive investments?
This question gets bounced around a lot and it won't get answered here! This is just an acknowledgement that the outcome of an investment is heavily nuanced and the strategy is highly personal. Evidence suggests that divestment may not result in the desired outcome and that leveraging shareholder demand for decarbonization may produce better results. Divestment seeks to stigmatize fossil fuels and reduce their financial desirability; a more effective strategy in countries with strong environmental policies.
Thankfully, increased regulatory pressure will mean it will be easier to see where your money is being spent and the intention will be to stop funding emissions production.
Are requirements changing for all financial institutions?
Regulations are now changing to favour and reward low emitting corporations. The TCFD has outlined it's recommendations for disclosing climate risks. The World Wide Fund (WWF) has recently released a complimentary framework for standardized, science-based target reporting. The launch of the International Sustainability Standards Board (ISSB) may yet simplify these complicated disclosures!
