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Cambridge Institute for Sustainability Leadership

Flooding

 

Why risk and resilience matters


Financial institutions and their regulators are 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 solely 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. 2021 sees the publication of the Dasgupta Review of the Economics of Biodiversity and launch of the Taskforce for Nature-related financial disclosures (TNFD), in recognition of how environmental sources of risk are vaster than those posed by climate change alone.

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, the Cambridge Conservation Initiative 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 identify environmental sources of financial risk and 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.

 

Current programmes of work


Nature-related financial risks

The Banking Environment Initiative and Investment Leaders Group are working closely with banks and asset managers to:

  • Identify and assess the financial risks of nature loss
  • Determine a common language and framework for risk identification, so that nature-related financial risks can begin to be measured and managed by industry leaders.

The programme has so far published:

  1. Briefings detailing the current ways biodiversity loss and land degradation can be seen as financially material, underscoring that materiality but also the limitation of current methods.
  2. A handbook for nature-related risks, explaining key concepts and providing a framework for risk identification
  3. An introduction to nature-related finance

During 2021, we are creating with banks and asset managers use cases that demonstrate specific nature-related financial risks. These use cases will showcase methodologies that aim to bring home more precisely how nature loss is a risk to financial institutions.

 

Our work and thought leadership

Gearing up for regulation: The ClimateWise Principles Independent Review 2018

13 December 2018

December 2018 – The ClimateWise Principles Independent Review 2018 finds the largest year-on-year improvement in group mean score against the Principles since 2014, and confirms the full alignment of the updated ClimateWise Principles with TCFD recommendations.

Embedding environmental scenario analysis into routine financial decision-making in Mexico and South Africa

2 November 2018

November 2018 – Following on from its work as a knowledge partner to the G20’s Green Finance Study Group, CISL's Centre for Sustainable Finance has published reports on embedding environmental scenario analysis into financial decision-making in Mexico and South Africa.

Trustees should prioritise climate risk

15 October 2018

15 October 2018 – The facts speak for themselves and must be acted on – trustees need to prioritise climate risk says Andrew Voysey, CISL’s Director for Sustainable Finance.

A landmark report supported by CISL assesses the financial impact of disruptive energy transition

9 October 2018

11 October 2018 – On Monday, De Nederlandsche Bank (DNB) launched an energy transition risk stress test for the financial system of the Netherlands. The study, supported by the University of Cambridge Institute for Sustainability Leadership's Centre for Sustainable Finance, provides a first attempt at assessing potential financial stability impact of a disruptive energy transition.

Financing sustainable infrastructure

28 September 2018

There is no lack of financing interest for large infrastructure projects. However, there is a lack of projects which have an adequately managed risk profile that financiers can understand, clear commercial returns within a reasonable time frame, proven sustainability credentials and sufficient convening power to blend different forms of finance into a successful package. In order to address this greater focus is required on how to direct capital into an emerging class of projects known as 'sustainable infrastructure'.

G20 approaches to implementing the recommendations of the Task Force on Climate-related Financial Disclosures

30 May 2018

May 2018 – This report; Sailing from different harbours: G20 approaches to implementing the recommendations of the Task Force on Climate-related Financial Disclosures, reviews the progress made by the national regulatory agencies of G20 members in making the TCFD recommendations relevant to their national contexts. It considers actions taken by the national (and international in the case of the EU) regulatory authorities in underlining the relevance, and taking steps towards potential implementation, of the TCFD recommendations.

ClimateWise transition risk framework: Managing the impacts of the low carbon transition on infrastructure investments

22 May 2018

The ClimateWise Insurance Advisory council has launched an open-source framework to support investors and regulators assess how the transition to a low carbon economy will impact the financial performance of infrastructure investments. The framework and accompanying step-by-step guide align with the G20 Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) and inform practical actions – for asset managers, owners and regulators – on capturing emerging opportunities from the low carbon transition.

Resilient cities: A toolkit for insurers to identify the business case

15 November 2017

November 2017 – This toolkit is designed to help insurers identify commercial opportunities, through the development of new products and services that can support cities in their response to natural catastrophes. The toolkit, which is split across two workshops, contains all the material a facilitator needs in order to hold internal conversations on the future role of their organisation in managing the protection gap.

Insurable Cities: The ClimateWise Principles Independent Review 2017

15 November 2017

November 2017 – The ClimateWise Principles Independent Review 2017 of the six ClimateWise Principles finds a third year of improved scores for members of the insurance industry leadership group. On its 10th anniversary the report finds the industry has improved its investment activities but members should look to further integrate climate change related initiatives into their core business strategies and look to increase board-level oversight on climate change and sustainability.

New tools and analysis from CISL published in G20 report to help financial firms manage climate risk

7 July 2017

11 July 2017 – For two years CISL has been a knowledge partner of the G20 Green Finance Study Group, with the resulting report, 'Enhancing Environmental Risk Assessment in Financial Decision-making', published at the end of the G20 summit. Kajetan Czyz, Programme Director, Sustainable Finance at CISL, discusses how the tools in the report aim to help financial firms carry out environmental risk analysis more effectively.

Image

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

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