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Page 2 - Op-Ed: Reducing exposure to physical climate risks may increase longer-term risks

Paris Agreement itself as the agreement relies on significant co-financing by the private sector of adaptation and mitigation measures in emerging and developing countries. Products that discourage capital flows to vulnerable areas may undermine trust in the whole agreement.
There is also an ethical dimension to this discussion. Increasingly investors are defining their purpose in a much broader sense than only financially. Pension fund savers indicate they want their savings to contribute to solutions for global challenges; think of the Sustainability Development Goals. Making it harder for vulnerable areas to adapt to climate change runs counter to these goals. Therefore these new products surely are not fit for purpose as a ‘responsible’ investment product – which is exactly what some of these products are calling themselves.

Finance has woken up to climate related risks and opportunities. Now it has to find a strategy to deal with them. Physical risks need to be managed. Keeping the world on a (well below) 2°C path is the best way to do just that. Of course, at the same time investments in climate resilience and adaptation are required to deal with the physical impacts of climate change that are unavoidable. Article 2c of the Paris agreement highlights the need for: ‘Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development’. Regretfully, products that underweight investments in areas that are vulnerable to the physical impacts of climate change do not make a contribution to either of these goals and therefore do not belong in a portfolio that aims to invest in support of the Paris Climate Agreement, nor in that of any responsible investor.

This article was jointly written by Rens van Tilburg, Director at Sustainable Finance Lab, Utrecht University, and Willemijn Verdegaal & Lisa Eichler, Strategic Climate Solutions, Ortec Finance

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