// WETENSCHAP & PRAKTIJK
DELIVERING CLIMATE RESILIENCE THROUGH FINANCIAL DISCLOSURES By Jacqueline Duiker and Paul Smith
Current disclosure frameworks provide a solid basis for financial institutions to assess climate risks. However, the climate resilience goals recently outlined at the Climate Adaptation Summit 2021 require these frameworks to also integrate real world resilience.
Photo: Archive Jacqueline Duiker
Even in the best-case scenario, if we do manage to limit global temperature rise by 2100 to +1.5°C, we can expect an 8% loss in global GDP (Carbon Brief, 2018). Climate adaptation is not a choice: our ability to adapt to both acute and chronic hazards will define how resilient our societies are to present and future climatic change. There may even be clear benefits: The Global Commission on Adaptation estimates investing $1.8tn in climate adaptation in the decade up to 2030 could yield up to $7.1tn in public and private benefits (GCA, 2019).
HOW IS THE FINANCE SECTOR RESPONDING TO CLIMATE RISKS? Financial institutions are increasingly encouraged to assess and disclose the climate risks they face, to quantify the impacts of climate change on portfolios, and to improve climate risk management. The recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) provide the most mainstream of these reporting guidelines and other reporting frameworks, namely SASB, CDSB, CDP, GRI and IIRC, have committed to working together to develop comprehensive corporate reporting, including climate risk (CDSB, 2020). While the TCFD includes both transition and physical risks into its framework, the focus of many financial institutions has so far been on transition risks. Leading financial institutions are even moving beyond risk management and are proactively setting targets to align their portfolios with the Paris Agreement.
DOES DISCLOSURE LEAD TO REALWORLD RESILIENCE?
Jacqueline Duiker
58
FINANCIAL INVESTIGATOR
NUMMER 1 / 2021
These frameworks are not explicitly designed to build resilience in the wider economy and society, other than as a ‘potential co-benefit’ of portfolio risk management. Few investors are actively embedding adaptation in their investment decision-making processes. For example,
only 22% of pension funds in the Netherlands currently engage with investees about climate-related physical impacts (VBDO, 2019; p.19). Even then, the focus is on direct risks at the asset level, as opposed to socio-economic adaptation impacts of the asset. Even more than with transition risks, addressing climate-related physical risks is hugely complex. Effective adaptation will require financial institutions to also manage these risks and impacts by engaging with public institutions, civil society and other economic actors, in order to reduce the negative and increase the positive real-world impact of their business at both global and local levels.
COULD DISCLOSURE AT SCALE ENCOURAGE GREATER ENGAGEMENT ON ADAPTATION? The Network for Greening the Financial System (NGFS), a coalition of central banks and supervisors founded in 2017, stresses that climate risk disclosure can build financial sector resilience and lead to better risk management, while enabling market players to better identify opportunities ‘thereby contributing to the growth of the green finance ecosystem’ (NGFS, 2020, p.32). This will only be possible if the currently low level of physical risk disclosure is scaled up by financial institutions, leading to:
