Originally published 10.26.2020
As governments continue to make aggressive climate commitments to build net zero carbon economies over the next 30+ years, financial regulators around the globe stand to benefit from early adoption of holistic climate risk assessment tools that monitor both physical and transition risks and opportunities to financial institutions.
On September 22, 2020, Chinese President Xi Jinping announced that China would achieve carbon neutrality by 2060. This was a groundbreaking proclamation, given that China is the largest emitter of carbon dioxide emissions.
 Union of Concerned Scientists, 2020. https://www.ucsusa.org/resources/each-countrys-share-co2-emissions
China’s actions on curtailing emissions cannot be underestimated if our global economy is to make meaningful progress on becoming net zero. “Net zero carbon economies” may not reduce all of their carbon emissions across sectors to real zero; however, the “net” concept offers several options; purchasing offsets or investing in carbon removal technologies.
In Europe, several countries have made formal net zero by 2050 commitments via the United Nations climate convention (Sweden, United Kingdom, France, Denmark, New Zealand, and Hungary); the European Union (EU), Spain, Chile, and Fiji are all following closely behind with proposed legislation.
As legally binding commitments expand, financial markets will need to shift away from sectors associated with high emissions and instead prioritize investments in clean energy. Scalable software-as-a-service solutions that screen for high-carbon investments will assist financial markets and investors to reallocate their capital accordingly.
Today, investors are taking advantage of software to identify and quantify physical and transition risk in their portfolios. For example, hurricanes and coastal flooding are physical climate risks that pose both acute and chronic threats to companies and their underlying assets, which may impact their valuations when business interruption occurs or when unplanned capital expenditures become unmanageable. Investors will be planning for the transition to a low-carbon economy, and they will also be factoring in the risk of climate change to their assets in a quantifiable and material manner.
Emissions reporting will continue as standard practice as climate risk reporting gains traction and is also predicted to become compulsory. The Task Force for Climate Related Financial Disclosures (TCFD) is the most widely accepted framework used by investors to report their climate-related physical and transition risks and opportunities in a consistent format.
Early adopters of climate risk assessment tools for financial institutions will be rewarded with a seat at the table when these standards around climate risk reporting require formal definitions and associated metrics. Additionally, there will be competitive advantage in reducing portfolio risk while investing early in the largest climate risk-adjusted opportunities across regions and sectors.
We are at a turning point in the climate conversation, and we have the opportunity to turn what were once qualitative theories about climate change impacts into quantitative risk results that Chief Financial Officers or Risk Managers can clearly understand. Climate risk will become an essential component of fiduciary responsibility, as a result of country mandates and customer demands. Where will you be when international support for net zero reaches a tipping point, and investors have nowhere to go except towards green, clean investments?
For more information on how climate risk and catastrophe models are being used in the insurance industry: https://www.theclimateservice.com/news/uniting-catastrophe-and-climate-models
For a third party evaluation of climate risk providers: https://www.theclimateservice.com/tcs-new-wave-leader
Lisa Veliz Waweru, Customer Success Lead at The Climate Service