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Cambridge Institute for Sustainability Leadership (CISL)

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

Read more at: Financing sustainable infrastructure
Blanda Power Station

Financing sustainable infrastructure

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'.


Read more at: G20 approaches to implementing the recommendations of the Task Force on Climate-related Financial Disclosures

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

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.


Read more at: ClimateWise transition risk framework: Managing the impacts of the low carbon transition on infrastructure investments
Navigating the Transition

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

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.


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

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

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.


Read more at: Insurable Cities: The ClimateWise Principles Independent Review 2017

Insurable Cities: The ClimateWise Principles Independent Review 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.


Read more at: Closing the protection gap: ClimateWise Principles Independent Review 2016

Closing the protection gap: ClimateWise Principles Independent Review 2016

December 2016 – The ClimateWise Principles Independent Review 2016 of the six ClimateWise Principles finds a second year of improved scores for members of the insurance industry leadership group. Members have demonstrated their ongoing support for the zero carbon, climate-resilient transition yet the report finds a need for the industry to do more within its investment activities.


Read more at: Environmental risk analysis by financial institutions – a review of global practice

Environmental risk analysis by financial institutions – a review of global practice

September 2016 – The G20’s new Green Finance Study Group asked the Cambridge Centre for Sustainable Finance to serve as Knowledge Partner and make recommendations on how to integrate environmental risk into mainstream financial decision-making.


Read more at: The ClimateWise Insurance Advisory Council
Storm

The ClimateWise Insurance Advisory Council

The ClimateWise Insurance Advisory Council is a group of C-suite executives drawn from across ClimateWise’s global membership base. They commission impact research into ways the insurance industry can support the zero carbon, climate-resilient transition. Insurance is among the industries most...


Read more at: Feeling the heat: An investors’ guide to measuring business risk from carbon and energy regulation

Feeling the heat: An investors’ guide to measuring business risk from carbon and energy regulation

May 2016 – The COP 21 climate agreement indicates a growing global consensus for action on climate change. In response, this research report assesses the impact of future carbon- and energy-related regulation on the most sensitive industries and geographies at a company level.


Read more at: A climate of change: ClimateWise Principles Independent Review 2015

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.


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