Climate change is an environmental, social and economic risk, expected to impact both in the long and short term. To address it, and avoid dangerous temperature increases, change is needed now. Investors cannot therefore assume that economic growth will continue to be heavily reliant on an energy sector powered predominantly by fossil fuels.
With global implementation of the Paris Agreement underway and climate policies rapidly developing, there is a need to ensure that financing and investment decisions made today account for and manage climate transition risks.
Banks will be affected by climate change mostly indirectly to the extent that general economic activity is affected. With regard to risk management, banks’ value creation potential will be determined by their ability to anticipate how their clients will be affected by climate change. Consider that the Economist Intelligence Unit estimates, “Warming of 5°C could result in US$7trn in losses – more than the total market capitalisation of the London Stock Exchange – while 6°C of warming could lead to a present value loss of US$13.8trn of manageable financial assets, roughly 10% of the global total”.
At the same time, the need for investment in new green technologies and infrastructure as well as changing consumer and investor preferences will create unprecedented business and labor opportunities. For example, a McKinsey report on the Netherlands estimates that investing €10 billion per year between 2020 and 2040 in a low-carbon energy system could boost economic growth and create some 45,000 jobs in the near term, with the potential addition of tens of thousands of jobs over the long run.
Consequently, it will be crucial to understand the direct as well as indirect effects of climate change on asset quality and identify investment risks.
My name is Gala and I work in a bank. I’ve lived in eight countries; I speak six languages; I have three degrees and one passion: financing renewable energies.
We are interdependent on the web of nature, and we must think, act and invest accordingly.