The COVID-19 pandemic has shown the deep turbulence caused by an unexpected global crisis on financial institutions and markets – and as a result on entire economies. In many ways, it has been a testing ground for the next seismic and unchartered shift that will be climate change – and it is no surprise to see climate risks now move up the priority list for financial leaders, governments, and regulators.
If the changes we faced in the wake of COVID-19 were “unprecedented,” climate change will be a whole brave new world on top of that. Climate change will change everything – how we live, how we work, what we buy, how we structure society, how we interact in communities, how we travel, even what we eat. It will be a magnified version of what we’ve tasted during the pandemic, at an even more unpredictable pace. In addition, to assess its potential impact on world economies, we need to assess its impact on individual firms.
Climate change first started to appear on global financial governance radars over the last decade but quantifying its effect on financial services and organisations is still a relatively new and developing practice. While it is true that insurers have been modelling increasing losses due to weather-related effects for some time, changes in policy and economic drivers to meet low carbon transition are rather more difficult to predict.
These climate-related financial risks are complex because they can be interdependent – and can’t be predicted based on historical losses or experience. The climate data and regulatory response to what is required to move whole economies to carbon-neutral are also not set-in stone and will continuously change as economies move forward. Models may produce interesting guidance, but they cannot be taken as gospel. For example, sudden and disruptive events may change perceptions in investor asset values and economic drivers – for instance due to increases in carbon emission prices. Changes in regulation may push advances in technologies that could also drive market shifts.
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