Climate change

The investment perspective

The 21st annual Conference of the Parties (COP 21), held in Paris during December 2015 and ratified in early October 2016 by 74 signatories, has propelled global warming toward the top of the financial services agenda. Even so, the sheer scale of the issue makes it a challenging one for many institutions.

Stranding may have grabbed the headlines, but it is arguably the tip of an iceberg. If commitments to limit global warming to 2°C are to be fulfilled, then the coming decades will see a worldwide “energy transition” with vast financial implications. Financial institutions face many interrelated and highly complex climate-related risks. On the upside, research suggests that investment opportunities arising from the energy transition will actually outweigh climate-related risks in the long term.

The scale of these issues calls for an urgent response across the investment value chain. Individual firms also have a duciary duty to address climate-related opportunities to enhance value of the investment. Indeed, climate-related risks are too far-reaching for financial institutions as the possible value creation or erosion can be significant. They will impact all sectors, including extraction industries (mining and energy), manufacturing, and carbon sinks such as forestry. A dearth of consistent, reliable data and an absence of credible analytical models also mean that investment professionals trying to address climate change are largely working in the dark.

Despite these obstacles, nancial institutions are taking tangible actions to address climate-related challenges. This not only allows them to begin identifying risks and opportunities. It also shows that external stakeholders such as regulators, individual investors and the media are playing an active role in the energy transition.

The report will address a number of specific steps that asset owners, asset managers, banks and other players, such as consultants and advisors should consider taking. These vary between institutions, but consistent themes include:

  • Developing investment beliefs
  • Strengthening governance and risk management
  • Working with clients to develop investment strategies
  • Engaging with other financial institutions and nonfinancial companies

Above all, it is vital for nancial institutions to understand that addressing stranding risks and other nancial risks and opportunities of climate change is not a one-off process. It needs to become a permanent part of everyday decision-making.

Addressing climate change requires collective action and collaboration across the investment value chain. But individual institutions bear ultimate responsibility for managing climate-related risks and opportunities on behalf of their clients and their own shareholders. Those that respond proactively will create value for their clients, give themselves a competitive advantage, reduce systemic nancial risks and make an invaluable contribution to society as a whole. However, those who fail to take action will soon experience the implications across the whole investment value chain, resulting in signi cant costs and damage to economies.

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