Daunting forces of the natural world

Daunting forces of the natural world

“Covid-19 reminds us all that we cannot ignore the daunting forces of the natural world”

Andrew Hauser, Bank of England

The economy and the environment are intricately linked with devastating consequences when things take a damaging turn as evidenced during the current COVID-19 pandemic. Climate change is a crucial part of this relationship and now it is even more important than ever that it remains high on the agenda and is not lost in the current global health crisis. We all need to take decisive action and in Hauser’s words  ‘true success will come when we don’t even talk about climate risk and return anymore as a special category, but simply factor it into our every decision as part of an integrated whole.’ So how can this be achieved?

Hauser acknowledges that ‘2020 is not the likeliest of years for the green revolution to have started paying off in financial markets’ but things are rapidly changing.  ‘Hot air is turning into cold hard fact,’ as financial markets are finally getting a grip on how to price climate risk and return.  But how long will it take for the lending community to catch-up and integrate climate change into day-to-day risk management? Pressure is mounting as seen with the pending 2021 deadline imposed by the PRA concerning lenders approaches to managing climate-related financial risks.

Hauser reinforces this message by discussing how many organisations have been calling for the issue of climate change and climate economies to be taken seriously. This has been accelerated with the current threat of COVID-19 which has made everyone more alert of forces out of our control. Economic trends that had previously been slow to reveal themselves have started to gather pace. Climate oriented equity indices for example have outperformed the broader market by 2-5% in 2020.  Green bonds also outperformed their conventional counterparts over that same period, and made up a fifth of total European investment grade issuance in September alone

Climate change risk is something we must all be personally and commercially aware of. Financial markets and institutions play a key supporting role by providing insurance against risks, with the need to strike a fine balance to ensure cover is adequate and realistic. The recent floods across the UK have highlighted the need to protect all assets including land and property for commercial and residential owners. Climate-related natural disasters are already three times more frequent than 40 years ago and Hauser sets out three ways corporate markets can build an effective infrastructure. Firstly consider disclosure of climate-financial risks which is something organisations have been slow and unwilling to do in the past but this is now becoming essential, secondly climate linked capital investments such as green bonds and thirdly climate-focused asset allocation strategies allowing investors to construct portfolios aligned with, and facilitating, the transition to a carbon neutral economy.  

Progress has been slow…

Progress has been slow in the past but capital markets are changing and innovating in response to demand from clients, businesses, investors, and public authorities to take climate risk and return seriously. Fund managers are reviewing their investment strategies to bring sustainability to the fore. For example, more than 500 global investors, accounting for over $47 trillion of assets, have committed to support the Climate Action 100+ initiative, aimed at ensuring the world’s largest corporate greenhouse gas emitters act on climate change. (Source: http://www.climateaction100.org/).

Today most corporate cultures are embracing sustainability and companies across the economic spectrum are starting to address climate change. More must be done. But institutional investors are stepping up and using their muscle to ensure that companies commit to tackling climate change and undertake the required risk assessments. 

Are you prepared for the challenges ahead posed by climate change and do you have a strategy in place to manage environmental-related financial risks? The team at D-Risk can help you.

Talk to us at D-Risk today...