Climate Risk and Sustainable Finance

Climate Change Tops Risk Correlation Ranking

Lois Tullo, Executive in Residence, Global Risk Institute


According to the World Economic Forum, Environmental Risk accounted for all of the top five risks by likelihood and four by impact [1]. Our 2020 research [2] identified a shift in prioritization of the 5 key risks and trends correlations (Box 1), with an increase in likelihood and impact of all risk correlation rankings over 2019.



Summary

Climate change is a broad and diverse trend that poses a significant challenge for Financial Institutions (FIs) to address. This paper provides examples of climate change/extreme weather events/natural disasters correlations and recommendations for FIs to address them. It explores the “how” to meet the Task Force Climate-related Financial Disclosures (TCFD) recommendation for an effective governance structure. It also supports the Final Report of the Expert Panel on Sustainable Finance, recommendation #5: to define and pursue a Canadian approach to implementing the recommendations of the TCFD. The strategic implications of climate change for organizations in the financial services industry are highlighted through the Global Risks and Trends Framework (GRAFT). This article identifies the Risk and Trend Correlations, Magnitude of Correlations, and KEY INSIGHTS (Table 1, pages 4 - 11, events or potential events stemming from correlation of trends & risks). A summary of theses insights includes:

• Organizations should examine the strategic assumptions underlying their strategies upon which to develop early warning systems so as to predict and prepare for the onset of climate change tipping points.

• Base climate change disclosure upon the double materiality perspective of:

climate change disclosure = impact (financial) + impact (environment + social)

• Disaster planning must include protection for employees, as well as knock-on implications of long-shutdown periods, alternative supply to supply chains, and granular understanding of the insurance coverage in the event of natural disaster

• Specific industry credit adjudication, and scenario analysis must consider impact of climate change and extreme weather events and natural disasters.

• National and corporate leaders must support global cooperation through internal initiatives, external reporting, and multilateral support.

• Organizations need to establish a process of measuring climate change.


FOOTNOTE

[1] https://www.weforum.org/reports/the-global-risks-report-2019, page 6
[2] Informed by the risk rangking surveys that are summarized in the APPENDIX III