Financiers facing up to climate change risks

The insurance and investment industry has woken up to the implications of climate change over the past few years, recognising the huge impact it could have on the world financial market. This article looks at the pressing issues, the reaction of the EU and what is being done.

EU Lisbon Strategy

A fundamental aspect of the EU’s Lisbon Strategy is that environmental issues and concern for the sustainability of development are at the heart of economic progress in the European Union. For further examination of EU policy see our LinksDossiers on Sustainable Development: EU Strategy and EU policies on climate change.

The Commission’s corporate social responsibility programme is also pushing businesses towards contributing to sustainable development.

Investment

Investors are realising that they will have to take climate change risk into account in deciding how to invest. The level of risk associated with certain investments, according to geographic region or type of industry, will alter as the effects of climate change are felt. Secondly, whether or not companies are taking steps to reduce emissions, to promote clean technologies etc, will have an impact on the level of investment they attract. Also, investors may see new opportunities in companies and technologies which, because of their awareness of climate change issues, are more likely to ride the storm in the long run. 

Insurance 

The insurance industry has already had to deal with claims related to changes in climate – floods in the UK, heat waves in France and fires in Italy. In the UK, house holders in flood-prone areas have found they are bearing the brunt, with insurance premiums skyrocketing. In Germany, the NGO Germanwatch has launched an initiative for an insurance-based climate compensation scheme – an insurance policy specifically geared towards catastrophes caused by changes in the climate.

Pensions

An issue which is clearly linked to investment is pensions. If there is a change in the nature of investment, as the nature of risk changes, traditional pension funds may themselves be in danger. Add to this the ageing population and the reduction in the labour market making pension contributions, and you have the potential for breakdown in world systems for providing income after retirement. With the increasing capitalisation of the banking system, and the shifting of risk that entails, it is the individual workers, the contributors to insurance and pension funds, who are the true owners of capital. Many commentators are now pointing out that investment must be geared to safeguarding the long-term interests of these true owners.

International initiatives

The past few years has seen a growing number of bodies and forums formed to discuss this issue. Some of the leading international bodies are:


  • AccountAbility
    : international organisation aimed at enhancing individual and corporate accountability and sustainable development.


  • Ceres
    : group of US investment funds, environmental organisations and public interest groups campaigning for sustainable investment.


  • IIGCC
    : Institutional Investors Group on Climate Change: London-based group focussed on climate change risks and opportunities for the European financial market.


  • UNEP
    : United Nations Environmental Programme Financial initiative: global partnership between UNEP and the financial sector (banks, insurers and fund managers) working to understand the impact of environmental change on financial performance.


  • Investor Network on Climate Risk
    : forum for discussion on climate risk. 


  • SEFI
    : Sustainable Energy Finance Initiative: promotes increased investment in energy efficiency and renewable energy. 

  • BASE
    : UN-funded NGO building partnerships between finance and industry to promote sustainable energy.

Positions

The view of the IIGCC is that "climate change is arguably the biggest environmental risk management challenge" facing large investment firms. It has noted that governments have been slow to recognise the crucial role institutional investors must play in any effective climate change programme.

Greenpeace takes the view that global monetary policy is ignoring the need to direct investment towards environmentally beneficial projects and, quite to the contrary, detrimental developments continue to attract funding. It continues to lobby the World Bank and the International Monetary Fund to change their investment policy.

In June 2004, the Association of British Insurers issued a 
report
which showed that claims for damage caused by storms and floods in the UK could treble by 2050. It called for a joint approach from industry and government on how to deal with the effects, particularly on property, of changing weather patterns.

AccountAbility issued a 
report
in January 2005 which concluded that the investment community was not doing enough to include climate change risks in investment decisions. It said that investors must recognise the need for long-term financial planning, which takes into account environmental and sustainability concerns, as opposed to short-term gain.

In the UK, a Climate Change Impacts Programme has been set up to help businesses understand the impact of climate change and how to deal with it. It has developed a software tool enabling assessors to calculate the costs and weigh up the risks of various different strategies.

US 
researchers
have called for the implementation of immediate measures, such as a small tax on petrol, to be put aside as a society-wide insurance to pay for the future costs of climate change.

Background

The financial world is beginning to worry about how changes in the weather will change the value of investments. On 10 May 2005 an Institutional Investor summit on climate risk was held in New York under the auspices of the United Nations (UN). Attended by leading EU and US investors, the summit adopted an 
action plan
calling for:

  • a requirement on asset managers to assess financial risk from climate change;
  • investment of 1 billion US dollars in clean technologies;
  • disclosure by companies of financial risk from climate change;
  • ranking of the world's largest companies to include their efforts in climate change risk reduction.

These are all very laudable proposals but the question is how to implement them. There are those who counsel immediate action to guard against future catastrophe; those who take a wait and see approach; those who do not believe climate change will even happen and those who close their eyes to the whole problem. If something is to be done, all these positions must be brought together. This will involve a sustained effort from investors, industry (both the financial and the manufacturing industries) and governments. 

Further Reading

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