Carney’s investor-backed risk think tank flags up climate risks for finance

New report from Canada’s Global Risk Initiative

The investor-backed risk think tank co-founded by Mark Carney when he was at the Bank of Canada has released a new report saying financial institutions must act to mitigate the risks of climate change by taking a long-term viewpoint or face potentially ruinous consequences.

The Toronto-based Global Risk Initiative found that insurance companies, banks and pension funds are the most vulnerable.

The initiative, which comprises a number of Canada’s largest financial institutions including the Ontario Teachers’ Pension Plan, the Canada Pension Plan Investment Board and La Caisse de Dépôt et Placement du Québec, was co-founded in 2011 by then Canadian Minister of Finance Jim Flaherty and Carney, who become Governor of the Bank of England in 2012.

It aims to bring industry, government and academic leaders together in order to tackle the problem of risk management in the financial industry. Carney has since gone on to press for climate issues to be more integrated in finance; he championed the creation of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures.

The eight-page report, by the initiative’s Chief Research Officer, Professor Thomas Coleman, and Research Associate Alex LaPlante, examines the sources of risk across the three financial sectors and suggests why prompt actions must be taken if the world wishes “to economically manage these risks and maintain a stable economy”.In general, the report advocates the inclusion of risk analysis metrics in investment decisions so that financial institutions can allow for the various effects of climate change on their business.

The document argues financial institutions must account for the potential physical, regulatory, systemic, opportunity and reputational risks inherent in their portfolios or face significant damage to their businesses.

It draws attention to the statistic that 93% of public companies in the US face some degree of climate transition risk, as found by the Sustainability Accounting Standards Board (SASB), the non-profit group chaired by Michael Bloomberg.

In the case of pension funds, the think tank’s researchers recommend that in order to avoid these risks, managers should diversify their portfolios “across all sources of risk” and increase allocations to low carbon technologies and green energy. These are, it continues, the physical risk of assets being damaged by climate change, the regulatory risk tied up in devalued or stranded assets and the liability risk of failing to fulfill fiduciary duty.

It is pointed out that due to their large portfolio sizes and long-term outlook, pension funds are “uniquely placed” to play a crucial role in the transition to a low-carbon economy, both through involving themselves in public policy and decarbonising the capital markets. Link