Research

We emphasize and encourage links between academic researchers and practitioners at financial institutions to bring theoretical techniques to bear on real-world issues.

Climate Risk and Sustainable Finance

Climate change is a critical global problem with effects ranging from warmer temperatures and increased water scarcity to more frequent and severe weather events. As countries transition to lower carbon economies, certain markets may become obsolete, other markets may flourish and firms that choose not to address climate change may face new sources of reputational risk. All of these variables can inflict losses in the financial sector and undermine macroeconomic security. Although the physical and transition risks from climate change may present a clear threat to institutional operations, new investment and product offerings are also needed to respond to changing world needs.

GRI is engaged in expanding the financial sector’s understanding of climate risks while identifying proactive responses and new market opportunities.


Factoring Climate Risk into Financial Valuation

The report “Factoring Climate Risk into Financial Valuation” shows how climate-related data can be used with existing valuation models to determine a company’s climate change risk exposure in financial terms. GRI has supported the development of this tool to help investors incorporate extreme weather risk into their decision-making. This framework will fill in data gaps that are crucial for effectively assessing risk.

Climate Change Tops Risk Correlation Ranking

Climate change is a broad and diverse trend that poses a significant challenge for Financial Institutions (FIs) to address. This paper deploys one approach to weighing and prioritizing these risks, The Global Risks and Trends Framework (GRAFT), to examples of climate change, extreme weather events and natural disaster risk correlations and suggests ways for FIs to address them.

Climate Risk and Sustainable Finance – Outlook for 2020

Recognition of the risks and opportunities associated with climate change reached new peaks across financial markets in 2019. But where to from here? From big picture global forces right down to expected milestones in the Canadian financial sector, here are five big trends that will shape the climate risk and sustainable finance space in 2020

Debrief for Canadian Financial Institutions on COP25 Outcomes

Debrief for Canadian Financial Institutions on COP25 Outcomes Alyson Slater and Sara AghakazemJourabbaf, Global Risk Institute Global leaders concluded their annual negotiations on climate change over the past weekend, where carbon markets and more ambitious national emission reduction plans were key agenda issues. The Global Risk Institute in Financial Services has put together a quick… View Article

The Current State of Climate Disclosure by Financial Institutions

In our latest publication, we review the current practices that financial institutions are employing, globally, to comply with the recommendations developed by the Task Force on Climate-related Financial Disclosure (TCFD). We call for continued actions by the financial sector, governments, and standard-setting organizations and highlight six key areas of improvement to accelerate climate action and reporting.

Strategic Asset Allocation with Climate Change

We develop a top-down strategic pathway towards green investing and show that eco-investing should not be a puzzle or a sacrifice if investors consider the unknown impact of climate change on different asset classes.

Climate Change and Long-Run Discount Rates: Evidence from Real Estate

Robert Engle, statistician, winner of the 2003 Nobel Memorial Prize in Economic Sciences, and his team of researchers, undertook a project, in collaboration with GRI, to use the tools of modern finance and risk management to measure and model environmental risk. They have contributed significantly to the bourgeoning literature that studies how climate change affects asset markets and, in turn, how asset markets may affect the dynamics of climate change.

Assessing the Hazard and Exposure of Dams in the U.S.

Assessing the hazard and exposure of dams in the U.S. This report provides visibility as to the types of risks that could emerge and is an important read for investors, asset managers and insurance providers analyzing portfolio level risk.

Climate Extremes, Aging Dams & Levees and Cascading Failure Impacts Industry Report 2

The overall goal of this study is to develop a framework for rapidly assessing the hazard (i.e. the probability and magnitude of a dam failure) and the exposure (what gets affected by a failure), scalable over many regions for a preliminary ranking of the priority areas of concern. The intended application is for a portfolio level risk analysis by investors, asset managers, and insurance providers.

What Makes Green Investment a Puzzle?

The Society of Actuaries (SOA) Climate and Environmental Sustainability Research Committee awarded Sally Shen, Research Associate, Global Risk Institute, first prize for her three page essay “What Makes Green Investment a Puzzle” in May 2019. This essay argues that the myth behind the motivation of green investment is driven by both unknown knowns and unknown unknowns.

Climate Extremes, Aging Dams & Levees and Cascading Failure Impacts

Nearly a third of the dams fail due to overtopping, an event whose likelihood increases as the potential for severe storms increases. Aging dams and levees, in combination with an increasing frequency of climate extremes pose an unprecedented risk to communities around the world. The financial risk associated with the failure of such assets is unmapped.

Hedging Climate Change News

The climate is changing, but there is substantial uncertainty around the exact climate trajectory and as well as the economic consequences of climate change. As a result, investors around the world have a huge demand for hedging themselves against the realizations of climate risk.

Climate games: Who’s on first? What’s on second?

In view of the recent turmoil caused by international trade negotiations, we can view climate change policy in a game theoretic setting. In other words, although the major players may benefit from global emission reduction, there is a natural tendency to engage in climate policy as a strategic game. In this report, we study three different climate change games and compare with the outcome of choices by a Social Planner.

Cost-Benefit Evaluation of Investments in Climate Change Abatement

Many of the costs associated with climate change, such as large-scale coastal flooding and long droughts, are predicted to occur decades or even centuries into the future. However, societies have to invest today in order to effectively mitigate and reduce these long-run risks.

Mean Variance Approach to Environmental Risk

This research seeks to gain a better understanding of the impact strategic interaction and uncertainty have on our ability to make meaningful global reductions in greenhouse gas emissions.

Confronting Deep and Persistent Climate Uncertainty

Confronting Deep and Persistent Climate Uncertainty Authors: Gernot Wagner and Richard J. Zeckhauser Abstract Deep-seated, persistent uncertainty is a pernicious feature of climate change. One key parameter, equilibrium climate sensitivity, has eluded almost all attempts to pin down more precisely than a ‘likely’ range that has stalled at 1.5–4.5°C for over thirty-five years. The marginal… View Article

President Trump’s Paris Pullout: What it means for financial institutions

Throughout his campaign for the U.S. presidency, Donald Trump expressed skepticism about climate change and promised to repeal Obama-era climate policies. On June 1, 2017, President Trump made good on one of his biggest climate-policy promises by announcing that the United States would withdraw from the Paris Agreement. This paper discusses the impacts of this decision.

Managing Carbon Risk: A Look at Environmentally Conscious Indices

Increasingly, governments around the globe are implementing more stringent climate policies to help stimulate the transition to lower-carbon economies. This transition brings with it both risks and opportunities for the financial sector. In this study, we compare the carbon intensity and performance of ‘green’ equities portfolios (environmentally conscious indices) and traditional market portfolios (market indices).

A Target GDP Approach to Risk and Return in Climate Change Policy

Climate change is widely recognized as a serious risk that requires worldwide governmental action. Failing to act on climate change including the risk to the world’s financial systems by threatening financial resilience and longer-term prosperity.

Climate Change: Why Financial Institutions Should Take Note

Climate change is one of the most significant environmental, economic and social challenges of our time. Download a copy of this report to learn more about this relatively new risk category whose impact on organizations will continue to grow.

Climate Extremes: Aging Dams and Failure Impacts

Climate Extremes: Aging Dams and Failure Impacts Flood insurance has been one of the more challenging products to develop for the industry. Flood risk changes due to climate variations as well as land use change, including increasing development and exposure in areas “protected” by dams and levees. Further, in many cases, recognizing that this is… View Article

Multi-Period MV Approach to Risk & Return in Climate Change Policy

Multi-Period MV Approach to Risk & Return in Climate Change Policy There is increasing public pressure on governments to commit to credible plans to reduce greenhouse gas emissions through carbon taxes, cap and trade or other regulatory systems. The responses of governments to climate change will have large impacts on the economy and on the… View Article

A Financial Approach to Environmental Risk

This project uses the tools of modern finance and risk management to measure and model environmental risks by examining publicly traded environmental portfolios.