Climate. Risks. Matter.


2020 heaped misery upon misery. But from beneath the weight of global pandemic, racial injustice, political animosity, and democratic instability, strong, heartening signals delivered an unequivocal message: Climate. Risks. Matter. Climate risks have mattered to many for forty years. In 2020, Big Finance joined its powerful voice.

In January 2020, the World Economic Forum, alongside Marsh and Zurich Insurance Group, put out a call to institutional investors to face the risks of climate change, extreme weather, and water crises head on—all while achieving attractive risk-adjusted investment returns.

The same month, BlackRock foregrounded sustainability in its investment criteria for the first time. Larry Fink proclaimed climate risks as investment risks: “Even if only a fraction of the [climate] science is right, this is a much more structural, long-term crisis [than the 2007-2009 recession].”

The European Banking Authority for the first time began requiring banks to incorporate climate into credit policies.

In the US, Ceres urged financial regulators to treat climate change as a systemic risk. Among their recommendations: “require insurance companies to conduct climate risk stress tests and scenario analyses to evaluate potential financial exposure to climate change risks.”

In July, three dozen pension plans, fund managers, and financial institutions that together manage $100TN in assets explicitly urged the Federal Reserve to adopt the Ceres recommendations. And BlackRock again beat the climate drum, calling out water risks as the gravest of climate-related physical threats to companies and therefore investors.

In August, commercial flood insurance giant FM Global tied the cost of business disruption by flood to 5% loss, on average, to shareholder value. “That would seem to dwarf the cost of flood protection,” it added.

In the US public sphere, HUD created a $16BN program to pay for large-scale relocations of vulnerable communities away from flood risk. FEMA outlined a comparable program. The Army Corps of Engineers began tying federal flood-protection funds to incentives for local governments to relocate vulnerable homes and businesses first.

Climate change, and particularly flood threat, drew increasing attention as a credit risk for municipal bond investors. According to Moody’s, flood threats pose not just physical risk but rising credit risks to state and local governments, including economic instability, high maintenance costs, and lost tax revenues over a multi-decade horizon.

Meanwhile, innovative mechanisms for financing climate adaptation emerged in North America and around the globe.

Along the edges of the Great Lakes, following leads from cities along the Potomac and the Chesapeake, environmental impact bonds will finance new stormwater and flood mitigation systems.

Among the world's most climate-vulnerable economies, the V20, blended public-private insurance funds are improving access to risk transfer solutions, reducing vulnerability, and accelerating disaster recovery.

By September, the US Commodity Futures Trading Commission joined the chorus: “climate change poses a major risk to the stability of the US financial system and its ability to sustain the American economy.” Financial regulators must “move urgently and decisively to measure, understand, and address” these risks.

While carbon pricing is the single-most important USCFTC recommendation, the report recognizes that insufficient data and analytical tools “remain a critical constraint” and emphasizes the value of integrating scenario-based analysis into broader risk management frameworks. “Scenario analysis is gaining traction in several contexts, both domestically and internationally, and regulators are increasingly using scenario analysis to foster greater risk awareness.”

In October, the G20’s Task Force on Climate Related Financial Disclosures also urged scenario-based risk analysis. Scenario analysis, according to the TCFD, “provides new perspectives and unique insights, clarifies the predictable and uncertain elements in different futures, and reorients decision-makers’ mental models. Scenario analysis … broadens strategic thinking, and identifies options to address different climate-related circumstances. [It] is a cornerstone of resilient strategies."

And just this month, the Economist foregrounded the particular pain of water risks. "At current rates of consumption, the demand for water worldwide will be 40% greater than its supply by 2030, according to the UN. Portfolio managers are realising that physical, reputational and regulatory water risk could hurt their investments, particularly in thirsty industries such as food, mining, textiles and utilities.”

While much attention in recent days has focused on the new US administration’s climate-forward stance as a break from all things 2020, in fact its very much in step with it.

For stress testing and scenario analysis of climate driven water risks, the time has come.

Even as the year’s first atmospheric river delivers hi-risk levels of rain to parched California, we welcome 2021 and the work ahead. We’ll keep tracking the signals here.