Systemic Risk
Systemic risk has three characteristics, each of which maps to the threats posed by climate change:
1. Effects are pervasive, not confined to a sector or territory The most detailed work to date, by the Sustainability Accounting Standards Board, found that 72 of the 79 industries in the SASB classification system are affected by climate change. 2. Effects are non linear with unpredictable tipping points The long-term climate transition will almost certainly be volatile and messy. Global temperatures and rainfall may rise incrementally on average but extreme changes will be localized and deadly. 3. Effects are inter-related and the likelihood of Black Swan events impossible to predict. Climate change risk takes many forms—falling prices for shares in vulnerable companies; increased instability in countries ill-equipped to deal with drought, flooding, or other climate-related disasters; increased political turmoil in countries absorbing climate refugees. Each of these can be magnified by lack of climate risk management within the financial sector. The inter-related nature of markets and social systems can greatly amplify the inevitable disorder that will accompany heating of the global atmosphere. We have provided our full analysis of systemic risk to the world’s largest institutional investors, both indexed and active (we also offer a Powerpoint summary and a video). We argue that traditional portfolio risk management approaches (divest-invest; decarbonisation; long-short) cannot hedge climate risk away. Portfolio exposure to climate risk means investment managers have a fiduciary responsibility, not merely a moral one, to act in support of a rapid energy transition. |