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

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.

For the past two years CISL has been working as a knowledge partner of the G20 Green Finance Study Group (GFSG). The result of this knowledge partnership, led by CISL’s Andrew Voysey and Dr Nina Seega, is the Risk Analysis track' background paper Enhancing Environmental Risk Assessment in Financial Decision-making, which was co-authored with specialists from the Bank of England and UN Environment Inquiry and published at the end of the G20 Summit in Hamburg.

Last year, the G20 specifically referred to the importance of green finance in its final communiqué, and this year’s report looks to add to this body of work outlining how to perform environmental risk analysis (ERA) more effectively and make use of publicly available environmental data (PAED) to do so. Both are essential components in order to attract private capital for green investment in the future. 

As demonstrated by a number of case studies in the paper, environmental risk analysis is a material financial risk and needs to be treated as such. The background paper makes a number of specific recommendations to help financial firms develop and use the tools including:

  • analysis of near-term financial impacts at an individual firm level through more sophisticated ERA techniques
  • embedding ERA practices by seeking to mainstream ERA practice across all activities
  • revising risk management governance, ie amending credit policies, introducing sector limits; establishing board level governance to effect top down change and thereby reducing firm/investment level environmental risks
  • taking action to implement the framework through risk functions, such as: product Innovation, including development of ‘green’ products and services; reallocating capital, both away from assets evaluated as high risk as well as seeking new green investment opportunities; and engaging with stakeholders, including clients, investees, market intermediaries and policymakers, often forming collaborative partnerships to address systemic risks that fall outside immediate prudential considerations.

The topic of green finance has been building momentum since the Paris climate agreement in 2015, and CISL has been at the forefront of industry efforts to drive the agenda forward. "Green finance is a cross-cutting solution for many of the global challenges being discussed by G20 leaders this year; from climate change and energy supply to sustained economic growth, migration and even global security,” says CISL’s Dr Paul Fisher, a Bank of England veteran.

In a complex political environment with diverging views on how to tackle such issues like climate change and sustained economic growth, issues like green finance can offer new ways to find common ground. Financial firms see climate-related risk as a material financial risk and are working to manage it as such.

CISL’s Centre for Sustainable Finance has been at the heart of these efforts to drive forward progress in its finance sector leadership groups, representing 50 financial institutions across five continents. It is encouraging industry collaboration on the development of scenario planning tools relating to disclosure of climate-relevant financial information. It is also working with banks and investment leaders to identify challenges to this, including policy risk; the absence of common methodologies; issues with data comparability and consistency; time horizons; as well as the choice of industry-relevant scenarios.

CEOs from the insurance industry group ClimateWise have come together to commission further research from universities and the private sector into ways the insurance industry can manage so called ‘transition risk’ and support the transition to a zero carbon, climate-resilient economy. Their ClimateWise Principles also are a voluntary industry effort at documenting and disclosing members’ climate risk protection gap.

Huw Evans, Director General of the Association of British Insurers and ClimateWise member, said, “We must mitigate and manage the impact of climate change, and the insurance industry has a crucial role to play in tackling this massive long-term global challenge.” Similarly, fellow ClimateWise member John Scott, Chief Risk Officer for Global Corporate at Zurich Insurance Group said, “We believe that the implementation of effective climate policy mechanisms and the regular monitoring of outcomes is vital for investors to make well-informed investment decisions that can also better support governments in delivering their national commitments and priorities. We would therefore urge governments to stand by their commitments to the Paris Agreement at their upcoming Summit in Hamburg.”

The Investment Leaders Group (ILG), another CISL-convened global network of 10 leading investment firms with approximately US $4 trillion under management, has argued that investors should calculate and communicate the social and environmental impacts of their portfolios to the fiduciaries for whom they invest. ILG member, Will Oulton, Global Head of Responsible Investment at First State Investments said, “ESG analysis improves our understanding of how companies create value in the economy. Being aware of how these issues benefit or harm our investments is an integral part of serving our clients and is part of our fiduciary duty”.

The G20 Summit was held in Hamburg, Germany from 7–8 July 2017. The members of the G20 are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States and the European Union.


To download the full range of Green Study Finance Group input papers, visit http://unepinquiry.org/g20greenfinancerepositoryeng/.

About the author

Kajetan

Kajetan Czyz, Programme Director, Sustainable Finance.

Kajetan Czyz has a background in financial risk modelling, index design, corporate and policy engagement and has expertise in the energy sector transition. Most recently, he headed the Climate Aggregation Platform (a project with UNDP), green bond market development in India and the Green Infrastructure Investment Coalition at the Climate Bonds Initiative.

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Articles on the blog written by employees of the University of Cambridge Institute for Sustainability Leadership (CISL) do not necessarily represent the views of, or endorsement by, the Institute or the wider University of Cambridge.