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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

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

14 November 2014

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.

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

23 October 2014

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

23 October 2014

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.

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