Financial impact of climate change: the talk of the town

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As the climate’s tipping point gets closer, the financial elite are starting to fret about the financial fallout. One thing’s for sure - climate change is no longer just an environment problem, it’s a business one too.

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Extreme weather, drought, flooding, disease, social disruption and waves of environmental refugees – hardly sounds like a recipe for a thriving business environment. Climate change is threatening to undercut the foundations of healthy economies – and it seems that the financial sector is finally waking up to the fact that climate change is not only an environmental problem, it’s a business one too.

Warnings from financial experts
Climate change has come a long way from being perceived as the fringe realm of hippies and tree-huggers. Today, not only heads of state, but also financial institutions and senior figures are warning of its dangers. It is difficult to ignore according to Paul Fisher, a senior figure in the Bank of England, who recently compared the threat of climate change with that of the 2008 financial crisis. In a blog for Investments & Pensions Europe he wrote “New risks are emerging around climate change that… pose threats to the financial system not unlike those we faced in 2008, where banks, insurance companies, and large institutional investors could find themselves facing existence-threatening losses.”

Institutions echoing the warning call
It’s not just individuals ringing alarm bells, either. Schroders, with $520bn of assets globally, has become the latest high-profile investment firm to warn of climate-related disruption. It recently issued a warning that climate change was accelerating the global economy towards a ‘cliff-edge’ that few industries were prepared for and which would result in long-term global GDP losses of up to 50%. The announcement came with a new dashboard designed to help investors better understand complex climate-related investment risks.

Central banks and regulators probe deeper
Furthermore, major initiatives have sprung up to help companies transform the way they operate, govern and report; all to deal with the risks posed by climate change. For example over 100 major banks, insurers and investors have publicly committed to supporting the latest recommendations issued by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). This is essentially a voluntary framework for companies to disclose climate-related information in their financial filings. Although it is not the first initiative of this kind, it is groundbreaking in its own right, not least because it is backed by some of the most powerful people in finance. For example the taskforce is chaired by Mark Carney, Governor of the Bank of England (BoE) who has since announced that the BoE will now use it to probe banks’ exposure to climate change and is intent on internally reviewing the banking sector. This marks the first time a financial regulator has looked at climate risk in such a comprehensive way and at the banking sector in particular.

Disruption is imminent – better to be safe than sorry
While the transition to low-carbon energy is well under way, there is still a long way to go to decarbonize the world economy. It is likely that even with the best of efforts, companies will not avoid disruption from climate change risks – and many have yet to wake up to the reality of this threat. The introduction of climate-related disclosures in financial reports of companies is a solid first step in taking this precarious situation seriously.

This article has been compiled by Emilija Emma and edited by Laura Jockers in JLL’s Upstream Sustainability Services Team. It is based on an article first written by JLL’s Jiri Skopek for JLL’s Green Blog

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