Case Studies

3.Climate Change And The Importance Of Mainstreaming Climate Risks In Financial Institutions

Climate change refers to a broad range of global phenomena mostly caused by burning of fossil fuels, which adds heat-trapping gases to Earth’s atmosphere. It includes occurrences that cause global warming (overall increase in the temperature of earth) but also consist of other environmental changes such as the rise in sea level, loss of ice mass from glaciers, shifting of flower blooming season, and other extreme weather events6. These events have progressively been reshaping the Earth’s climate, the impact of which is now being felt with rapid global warming due to global emissions reaching record high levels and showing no signs of saturation. Total annual greenhouse gases emission reached a record high of 53.5 GtCO2e in 2017 after increasing by 0.7 GtCO2e from 2016 levels. However, the emissions in 2030 need to be 25% lower than the 2017 level to limit warming to 2°C and 55% lower to limit warming to 1.5°C7 .

While there was a general awareness about the threats of climate change in the late 1950’, no action was initiated on the same till the 1980’s. Post this, various efforts were made globally through science and scientists in order to estimate the impact of greenhouse gas emissions and their effects on humans and the society. The Intergovernmental Panel on Climate Change was established in late 1988 jointly by the United Nations Environment Programme (UNEP) and World Meteorological Organization (WMO) after series of events such as a severe drought and heat in the United States and vast fires in the Amazon rainforest and Yellowstone National Park8. This followed various negotiations and efforts such as the United Nations Framework Convention on Climate Change (UNFCCC), the Kyoto Protocol, etc.

The Paris Agreement of 2015 within the UNFCCC aims at restricting the increase in the global average temperature to well below 2°C above pre-industrial levels by 2100 and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels9. To meet the objective, there is a requirement for strict implementation of low carbon alternatives. The current level of 1°C of warming today relative to pre-industrial times is already having disruptive consequences on economies across the globe, through both its physical manifestations and mitigation actions aimed at avoiding these10 .

An industry led task force called the Task Force on Climaterelated Financial Disclosures (TCFD) has divided climate related risks into two categories: physical risks and transition risks. These risks are described in detail in the diagram below.

Climate Change, Components And Threats To Business11