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Risk and Resilience: Embedding resilience to environmental risk in routine financing decisions

Why risk and resilience matters


Financial institutions and their regulators are all recognising that environmental and social issues are now increasingly material drivers of mainstream credit, market and operational risks. This is a major shift from their historical treatment as reputational risks. 

The Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD) has been a major driver of this trend. The TCFD recommends that firms use forward-looking scenario analysis to assess climate risks. This is a necessary reflection of the fact that both the physical risks of extreme weather events and the transition risks derived from the shift to a net zero carbon economy will not mimic historical trends. 

However, using scenario analysis to integrate environmental risks into routine financing decisions presents most financial institutions and regulators with new challenges. If these can be overcome, the terms on which capital is provided will take better account of the true environmental risks different business activities face. One powerful application is to change how financial institutions assess the resilience of investments in infrastructure to climate risks. 

 

What is CISL is doing about it?


Cambridge’s strengths across both the natural and social sciences give rise to opportunities for truly multi-disciplinary centres of excellence, such as the Cambridge Centre for Risk Studies and the Centre for Environment, Energy and Natural Resource Governance.  

Against this backdrop, CISL works with insurers, banks and investors to develop practitioner-owned methodologies that help industry address how to integrate environmental scenario analysis into their decisions and direct capital towards sustainable infrastructure. We advise central banks and financial regulators on appropriate actions they can take and we develop research insights that deepen our collective understanding of the links between environmental and social trends and financial risk.

 

Our work and thought leadership


A climate of change: ClimateWise Principles Independent Review 2015

November 2015 – The 2015 independent annual review of the six ClimateWise Principles shows improved scores for members of the insurance industry leadership group. Progressive insurance companies are considering their exposure to climate risks while also developing their role as societies' risk managers.

A climate of change: ClimateWise Principles Independent Review 2015 - Read More…

Unhedgeable risk: How climate change sentiment impacts investment

November 2015 – This report analyses how shifts in market sentiment induced by awareness of future climate risks could impact global financial markets in the short term.

Unhedgeable risk: How climate change sentiment impacts investment - Read More…

Insurance regulation for sustainable development: Protecting human rights against climate risks and natural hazards

July 2015 – This report analyses the role of insurance regulation in protecting the basic human rights of life, livelihood and shelter against natural hazards and climate risk. Effective insurance regulation facilitates access to insurance (both traditional and alternative) as a means to increase communities’ resilience, fulfil related human rights duties of state and non-state actors and support the UN Sustainable Development Goals.

Insurance regulation for sustainable development: Protecting human rights against climate risks and natural hazards - Read More…

Stability and Sustainability in Banking Reform: Are Environmental Risks Missing in Basel III?

October 2014, report – The BEI’s focus to date has been driving sustainability standards into banking products and services by working with groups of leading customers. Its work in soft commodity supply chains has seen banks aligning with clients to develop commercially viable trade finance products and services that incentivise sustainable resource management. However, it has always been clear that those who regulate the financial system have a role to play in identifying and mitigating the potentially destabilising effects of environmental risks across the banking system as a whole.

Stability and Sustainability in Banking Reform: Are Environmental Risks Missing in Basel III? - Read More…

ClimateWise Thought Leadership: A one in ten chance: As risk experts do insurers really communicate risk effectively?

July 2013 – Exploring how the perception of risk affects customer responses to climate risk. How risk is perceived is key to whether people take action to manage risk. Advertisers use insights from behavioural science all the time but it is not often considered when looking at responses to unexpected events.

ClimateWise Thought Leadership: A one in ten chance: As risk experts do insurers really communicate risk effectively? - Read More…

ClimateWise Thought Leadership: The role of insurers in strengthening business resilience to climate risk

February 2013 – Tokio Marine & Nichido Fire Insurance is Japan's leading general insurance company, established in 1879. In this ClimateWise Thought Leadership article Kunio Ishihara, Chairman of the Board, discusses the role of insurers in supply chain resilience, and where climate change poses particular threats to these supply chains across Asian markets.

ClimateWise Thought Leadership: The role of insurers in strengthening business resilience to climate risk - Read More…

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Rewiring the Economy

This work relates directly to Rewiring the Economy, CISL's ten-year plan to lay the foundations for a sustainable economy.

Task 4: Ensure capital acts for the long term

Task 5: Price capital according to the true costs of business activities

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Severe flooding in a residential area of Baton Rouge, LA; credit: U.S. Department of AgricultureCreative Commons Attribution-2.0 Generic