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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

Five ways to mainstream green finance now

7 July 2017

11 July 2017 – How can the financial industry aid climate-related financial disclosures, enhance environmental risk analysis, and make better use of publicly available environmental data to analyse financial risk and inform decision-making on future investments, asks Dr Nina Seega, CISL Research Consultant and co-author of the G20 Green Finance Study Group’s background paper on Enhancing Environmental Risk Assessment in Financial Decision Making.

Closing the protection gap: ClimateWise Principles Independent Review 2016

1 December 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.

It's time for financial institutions to get serious on climate risk

7 September 2016

It's time for financial institutions to get serious on climate risk Paul Fisher, Senior Associate, University of Cambridge Institute for Sustainability Leadership 7 September 2016 As environmental and climate risks surge, the world's financial system needs to take them into account – now. This year...

The G20’s race to green the financial system | G20走向绿色金融系统的征程

7 September 2016

The G20’s race to green the financial system Andrew Voysey, Director, Finance Sector 7 September 2016 At their summit this year in Hangzhou , G20 leaders have been tackling head-on the effects of a languishing and increasingly unequal global economy. Encouraging more inclusive economic growth was...

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

2 September 2016

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.

The ClimateWise Insurance Advisory Council

3 July 2016

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...

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

4 May 2016

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.

A climate of change: ClimateWise Principles Independent Review 2015

20 November 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.

Unhedgeable risk: How climate change sentiment impacts investment

10 November 2015

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.

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

10 July 2015

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.

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