On July 2nd I attended The Economist Events’ inaugural Climate Risk Summit in London. Planning for climate change-related risks is now an essential task for any business. There is enormous pressure from investors, regulators and capital markets for better information on physical and transition risks.
The event highlighted the need for infrastructure resilience, convergence of climate science and business spheres, acceleration of climate action, investor action, quantification of climate risk exposure, and making costs of climate inaction more tangible (e.g. carbon pricing).
Highlights from the conference:
- Physical risk: there is a lack of comprehensive risk assessment (infrastructure, production, supply chains, markets etc). There is a need for awareness, insurance pricing, climate-related disclosure, consumer pressure, building codes, and social network of resilience.
- Transition risk: there is a need for an energy transition towards decarbonisation and decentralisation, investor engagement with companies (shareholder voting power), climate risk to be embedded in business models, data on climate change and financial performance.
- Finance: climate change is the world’s biggest market failure. Measurement of GDP and business accounting practices ignore climate risk and even encourage behaviour fuelling climate change. Green bonds often refinance existing assets. A sustainable finance paradigm is urgently needed.
- ”The new normal” implies systems-level solutions, e.g. transforming food system (alternative protein), financial innovation for retrofitting buildings, partnerships for responsible sourcing, and carbon pricing. What grabs attention doesn’t always have the biggest impact.
- Climate action: Todd Stern, former US special envoy for climate change, said that the Paris Agreement was necessary but not sufficient. Policy, business and consumer action is required. Some local/regional climate action in the US is world-leading (e.g. California’s 100% clean energy target by 2045).
- The courts: citizens are starting to sue corporates (e.g. anti-coal litigation) and government (e.g. in the Netherlands). Legal action can play an important role in holding lethargic governments and businesses to account.
- Risk exposure: it is important to value investments at risk (physical assets, stranded assets, demand growth risks etc) and to look at regulation, policy, long-term trends, and episodic events (e.g. hurricanes). Risk is often hidden in the supply chain.