It should be no surprise then that the recent publication of a framework for climate-related financial disclosures caused barely a ripple in the business press. The actuarial analysis of long-term gradual shifts in the atmosphere is not only hard to write about; it is definitively un-newsy. But the recommendations put forward by the Financial Stability Board (FSB) climate change task force – the group set up by Bank of England governor Mark Carney and media mogul Michael Bloomberg – are hugely important for one group in particular: investors. This, in ten points, is why:
1. Understanding and estimating risk is an essential part of financial markets and valuation.
2. Climate change is one of the biggest, and perhaps most misunderstood risks facing all organisations. Not only are the timing and severity of the risks hard to quantify, but the problem is both wide and long-term.
3. Though the risks are hard to predict, the scale of their potential impact mean they should factor into organisational decision making, both short and long-term.
4. At the same time, the 2015 Paris Agreement on climate change implies a movement away from fossil fuels and an accelerated transition to a low-carbon global economy. This could lead to severe financial shocks and sudden losses in asset values.
5. Consequently, investors, insurers and lenders would all therefore benefit from reporting standards which clearly demonstrate these risks.
6. This explains why a large number of the FSB task force’s 32 members hail from the financial sector. Simply put, it is inevitable that the group’s borrowers, investments, policyholders and clients will be impacted by such systemic risks.
7. Because of this, there is a clear need for listed companies, including lenders and asset managers, to provide useful, forward-looking information regarding their exposure to climate change, while focusing on the risks and opportunities related to the lower-carbon switch.
8. An organisation should therefore be able to describe how its governance, strategy and risk management policies take into account a range of climate change scenarios.
9. These should be measurable against metrics and targets.
10. In turn, this greater transparency should help investors better understand the risks to which they are indirectly exposed.
