A resolution for investors: we need to hear it from the top, go big, and get your hands dirty

Responsible Resolutions: This is the latest article in a series from sustainable finance practitioners about their hopes for the New Year.Resp

My full-time job is at the intersection of finance and climate change, and I will admit, it can be disheartening at times because of a lack of significant climate action over the years. However, in recent months, I’ve seen signs that we’ve reached a tipping point. The mainstream financial community has gotten engaged on this topic, new tools and products are coming to market, and investment commitments are slowly becoming real. The problems are that it’s only a handful of investors moving from deep discussions to managing climate issues, application of the results from climate tools is murky at best, and the emphasis on investment commitments tends to be on the ‘slowly’.

The World Economic Forum’s Global Risks Report 2020 has once again shown that climate change and related issues are top of mind for business, civil society and government thought leaders. In fact, these risks dominate the top five spots in terms of likelihood for the first time (and are also four out of the top five in terms of impact).My hope for 2020 is that significant, definitive and effective action is taken by the financial community and others to manage climate risks and accelerate the low-carbon transition. Specifically, we need to hear it from the top, go big, and get your hands dirty—with no more excuses.

Hear It From the Top

As an emerging risk, climate change is being brought forward by people on the front lines in companies – in operations, procurement, maintenance. A bottom-up approach, though important, has limitations. In my experience, a clear message from the board and C-suite will galvanise action across the organisation. This not only ensures there are adequate resources behind efforts, but addresses the tension that I still hear about from finance professionals – they care about climate change, but that it’s not their work.

In order for the leaders and decision-makers in the financial industry to act on, much less talk about climate change, they have to get educated. How can we expect any board member to start a climate-focused mandate that is going to take time, talent and resources if they don’t understand how climate impacts their business? The number one enquiry we get from financial institutions at Mantle314 is for climate education that is relevant for decision-makers. In 2020, I hope to see a concerted effort by these leaders to proactively seek out credible, third-party climate change education. The information exists, you just have to ask for it.

Go Big

In the search for that information, it’s easy to break climate change into small, digestible pieces and not look any further. But as it’s been said time and time again, climate is not weather. It’s not one storm happening a little earlier than normal or one mega-wildfire. Climate change is a systemic change to the underlying drivers of our economy, one that is having far-reaching effects around the world. Recognition in mainstream finance that climate change will change the shape of the global economy is gaining traction. BlackRock’s CEO Larry Fink summed it up nicely: “climate risk will impact both our physical world and the global system that finances economic growth” and therefore compel “investors to reassess core assumptions about modern finance”.

How can we expect any board member to start a climate-focused mandate that is going to take time, talent and resources if they don’t understand how climate impacts their business?

To date, most climate efforts have been niche, manifesting in a focused product or fund. The scale of climate change means investors have to make plans for the entire portfolio. Climate change is a systemic issue and needs to be treated as such. This means addressing the hard questions about benchmarks, passive indices, and asset allocation: topics that I was glad we included in our Decarbonization Advisory Panel report to the New York State Common Retirement Fund. I hope to see more of this in 2020.

Get hands dirty, no more excuses

My last hope for 2020 is to see more ‘doing’ and less conversation on the financial industry preparing for climate-related impacts. The phrase ‘perfection is the enemy of progress’ has never been more applicable than now. Climate change is a complex and messy topic, and translating the scientific knowledge into finance is not easy or well-understood. However, the lack of specific numbers or uncertainty of timing should not be an excuse for lack of action. The end results are well understood (market volatility and lost revenues, but also new opportunities) as is the direction in which we are travelling (physical impacts will get worse and the low-carbon transition is already underway). There is the temptation to wait for industry standards or to see how it works for the few who have taken the leap, but the lead time to put plans in place in even the smallest financial institution is considerable. A good start is using the TCFD recommendations to assess whether your organisation is ready to disclose their climate risk and opportunity. Getting TCFD-ready will lead to defining next steps and putting a plan in place so that portfolios are resilient in a low-carbon transition. No matter what stage you’re at, TCFD is always relevant and useful for identifying next steps in managing climate change for your business.

More and more people are waking up to the risks that climate change presents to the financial sector. Every day the drumbeat gets louder for the industry to take a leading role in the global fight against climate change. At times it can seem daunting, but there is so much great work taking place – work that RI helps to showcase and promote. Let’s hope that in 2020, we hear more messages on climate change from the top, that companies choose to go big, and finance leaders recognise there is more risk in staying in place than taking action.

Joy Williams is a Senior Advisor at climate risk consultant Mantle314. She was formerly Chair of the Decarbonization Advisory Panel for New York State Common Retirement Fund and a member of the responsible investment team for Ontario Teachers’ Pension Plan.