Climate Risk And The Finanial Sector
Climate risk is a key issue of concern in financial circles, and this is probably just the start; however, it is significant that two recent reports were published at around the same time by influential French organisations.
While the Bank of France (BdF) bulletin for September-October was entitled "Climate change: what are the risks for the financial sector?", a Finance for Tomorrow (F4T) report ("Climate risk in finance - concepts, tools and methodologies") also came out in September, with the aim of helping the very many sector participants likely to be concerned about the management of climate risk in finance.
And we shouldn't forget two other reports that were published this summer by the IPCC, on the link between climate change and agriculture, and on the oceans and the cryosphere, plus the various announcements and commitments made between the G7 in Biarritz and Climate Week NYC, and the Green Deal set out by the new President of the EU Commission.
The climate risks have now been clearly identified, and there are three types: physical risk, transition risk and liability risk. The tools for analysing these risks mainly use one of two methods:
- A tool for measuring CO2 emissions: the carbon footprint
- Tools for assessing the risks: the green/grey components, financial impact indicators, indicators of alignment with a 2-degree scenario and risk exposure ratings
At present, although the understanding of transition risk is improving all the time, liability risk remains a blind spot, while physical risk is rarely perceived as a potential threat.
However, the key element in climate finance lies in the appropriation of metrics and internal analysis. It is essential that climate risk is managed as a traditional financial risk, and that companies have in-house expertise to enable them to decipher and analyse data and refine their methodologies. Governance bodies should therefore be recognising the importance of climate risk as part of traditional risk management, and reflecting it in their corporate strategies. It is no longer appropriate for this risk to be discussed or assessed by isolated experts outside the information systems of financial sector players. Climate finance must be at the heart of what we do.
To read the Bank of France bulletin
To read the F4T report
Download the PDF