Climate change: risks and opportunities

This article was published in CISI member periodical Review on 202 1 10, before COP26.

The Global Risk Report released by the World Economic Forum 202 1, 1 and 65438+9 classifies the main threats facing the earth, and lists "failure of climate action" as the second most influential and most likely threat in the next decade, which is called "threat to human survival".

Climate change has a negative impact on global life and livelihood, and research shows that rising temperature will affect global economic growth.

June 5438 +2020 10, Swiss Patek Asset Management Company and Smith School of Enterprise and Environment of Oxford University published an article entitled "Climate Change and Emerging Markets after COVID-19 Epidemic" (Climate? Change and? E merger? Market? After coronavirus pneumonia-19). According to the report, in the worst case-the global average temperature will rise by 4.3 degrees Celsius-to 2 100-the world's per capita GDP may lose 44.9%, about 500 trillion US dollars. However, according to the report, if the goal of limiting the temperature rise to 1.6℃ is achieved, the impact loss on the global economy may be controlled at 27.2%. They believe that this goal, which is slightly higher than the Paris Agreement1.5 C, is the best possible result.

According to the Intergovernmental Panel on Climate Change (IPCC), the only way for us to achieve this goal is to achieve zero net carbon emissions around 2050. In order to achieve this goal, governments and enterprises around the world will double their commitment to achieve net zero emissions by 2020.

However, this has also brought about the problem of shelving assets, such as the unexpected or premature depreciation, write-off or becoming liabilities of oil reserves. Patek and Pictet-Oxford's report predicted that in the most optimistic case, there may be 5 trillion to 65,438+07 trillion dollars of existing or planned assets in trouble.

Therefore, the higher the carbon intensity, the higher the risk that enterprises will suffer losses due to policies to limit climate change. 20 19 12, un principles for responsible investment, Vivid Economics and energy transition consultants. According to the policy response report, the1000 companies with the worst performance in MSCI All Country World Index will lose 43% of their value, which is about 1.4 trillion dollars. On the contrary, the market value of the top 100 companies may increase by 33%. Therefore, incorporating climate risk into the overall risk assessment of the company has become a crucial link in the company's development.

There are many kinds of climate risks. Physical climate risk describes the negative effects of extreme weather events. Aon, a global insurance company, calculated in a report in 20 17 that weather-related natural disasters caused 97% economic losses in that year, with a total loss of13.4 billion US dollars. Investors should understand the climate risk exposure of their portfolios and the countermeasures they should take. S & amp； Global (S&; According to the data of P Global, 60% of the tangible assets owned by the Standard & Poor's 500 Index (market value 18 trillion US dollars) face at least one tangible climate change risk.

Climate change also brings transformation risks, which are caused by the development of net zero policies, regulatory frameworks and technologies aimed at slowing global warming.

The change of people's views on high-carbon industries also means that those enterprises that do not show great efforts to decarbonize their businesses will face reputational risks, which may develop into litigation risks.

Dr Pooja Khosla, vice president and customer development director of entel intelligent, a climate risk analysis platform, said that financial institutions must invest in climate risk assessment and mitigation measures to remain competitive and avoid reputation damage. A report by entel intelligent-"Smart Climate: A Market Approach to Dealing with Transition Risks" (Smart? Climate:? Answer? M market? Method? t o？ Transition? R isk )—— It is found that in all the retrospective tests from 3 months to 10 years, the companies with high "e-score" (measuring the risk exposure of climate change transformation in their industries) perform better than those with standard benchmarks.

"The financial industry is still pouring billions of pounds into industries that destroy the planet."

However, there is still a long way to go to turn the financial industry into a carbon neutral industry. ShareAction, a British non-profit organization, surveyed 75 largest responsible investment asset management companies in the world, among which 5 1% was in the lowest two grades.

Karen Ellis, head of sustainable economy of the World Wide Fund for Nature (WWF), said: "Although the situation is improving, the financial industry is still injecting billions of pounds into industries that damage the planet. We need to take urgent and powerful actions to ensure that the financial industry fully participates in climate risk solutions. "

Another challenge faced by financial institutions is the availability of climate data. This includes the lack of standardization, the difficulty in comparing the gap between industries, organizations and even countries, and the lack of data for some industries and regions, especially emerging markets and small companies.

According to the analysis of Neuberger Berman, an asset management company, most of the 7,000 companies that disclose the emissions reported by CDP to the global environment only provide limited data. Research shows that a large part of global companies do not report their "scope 3" emissions, including all indirect emissions in the company's value chain.

However, regulators and data experts are working together in Qi Xin to solve these problems. For example, the Science-Based Targeting Initiative requires applicants to screen emissions from "Scope 3". If more than 40% of carbon emissions are in the value chain, it is necessary to set emission reduction targets. In addition, many central banks, including Europe, Britain and Singapore, are incorporating climate change into stress tests.

In the past year, the availability of the transition risk analysis scheme has been expanding.

However, Pooja said that financial institutions themselves still have the responsibility to conduct necessary climate risk assessments. Although this task requires the development of reliable methods and appropriate frameworks, she believes that relevant technologies are already available in the market. She said, "We need financial institutions to cooperate with leading data providers to improve existing technologies to better meet the demand and obtain good results."

A report recently released by the United Nations Environment Programme, Climate Risk Outlook, summarizes the existing tools and analysis of 18 transition risk in the market, and points out that the availability of transition risk analysis scenarios has been expanding in the past year.

Some large institutional investors began to put pressure on the companies they invested in. For example, in 2020, BlackRock, the world's largest asset management company, required all companies it invested to disclose climate-related risks consistent with TCFD before the end of the year (see "Report Promoting Responsible Finance").

Jeanne Martin, senior activity manager of ShareAction, said that in this process, financial practitioners can take three measures:

Issue fossil fuel policies in line with climate science.

Set expectations consistent with1.5 c for customers operating in high-carbon industries and industries that will be seriously affected by transformation and physical risks.

The issuance target is consistent with 1.5 C, covering all financial businesses, and considering the social impact of the transition from high-carbon assets to low-carbon assets.

Another important problem of financial institutions is the lack of relevant professional knowledge and skills education support, because climate risk represents a new and complex professional field. This is also the motivation for CISI franchise alliance to launch a new climate risk certificate.

In the process of transition to carbon-neutral economy, there are obvious opportunities in the fields of renewable energy, electric vehicles and technology. At the same time, research including a recent article by MSCI found that the long-term performance of fossil fuel companies is lower than its national index.

The financial services industry may have greatly underestimated the profit opportunities brought about by the transition to net zero carbon emissions.

However, Pooja pointed out that, in fact, the largest carbon producer is "the source with the greatest potential to reduce global total emissions". She explained, "It is necessary to target industries such as energy and public utilities, because these industries are part of the economic ecosystem and bear most of the emissions, which is crucial to help achieve carbon emission reduction and net zero emissions." This can be achieved through transitional financing-financing terms are related to specific climate targets-voting at shareholders' meetings and cooperation with high-carbon companies can help them gradually reduce carbon emissions.

The good news is that according to a 2020 report by Oliver Wyman, an American management consulting firm, the financial services industry may have greatly underestimated the business opportunities brought about by the transition to zero net worth. The company estimates that although wholesale banks currently earn a total of $80 billion from services provided to "black/brown" enterprises such as oil and gas, the green economy can bring incremental income of $50 billion to $6543.8+$050 billion in various activities, which is the "single biggest growth opportunity" for the financial services industry.

Although the road ahead may be bumpy, the commitments made by the government and enterprises, as well as the regulatory framework and reporting requirements to support the transition to zero carbon emissions, can effectively motivate people and boost morale.