World Economic Forum calls for ESG factors to be mainstreamed into core financial processes

Climate change failure now world’s top risk – ahead of weapons of mass destruction

The World Economic Forum has called for environmental, social and governance (ESG) factors to be mainstreamed into core financial processes and indicators.

It argues that the “sheer number” of environmental social and governance (ESG) criteria is a barrier to investors trying to assess companies’ material climate risks.

“For many executives and boards of directors, climate risks seem less immediate than other issues,” the body says in its latest Global Risks Report, published ahead of the event. The report is based on the annual Global Risks Perception Survey, completed by almost 750 members of the World Economic Forum’s membership. It was compiled with partners Marsh & McLennan, the parent of investment consultants Mercer, and Zurich Insurance.

Even where ESG data are disclosed, it argues, “investors often remain unaware of the severity of the threat: these data tend to be appended in an annex rather than integrated into core financial statements, and they do not make clear the materiality of specific climate and regulatory risks.

“The sheer number of ESG criteria is a barrier to comparability and identification of material risk. Most analysts do not take opportunities such as earnings calls to raise questions on material climate risk.”

It argues that finding ways to factor climate and regulatory risks into short-term decision-making processes and related financial metrics is essential for driving climate risk–informed investments.

“This requires not only using better, forward- looking data and metrics, but also mainstreaming these elements in core financial processes and indicators.” It welcomes Bank of England Governor Mark Carney’s push to develop voluntary standardized reporting on financial risks associated with climate change.The World Economic Forum holds its annual meeting in Davos, Switzerland next week. The report reveals that the potential failure of climate change mitigation and adaptation is now the seen as the “most impactful risk” (having been in the top five for the past three years) – putting it ahead of weapons of mass destruction (2nd) and water crises (3rd).

“Investors often remain unaware of the severity of the threat.”

The WEF cites a number of initiatives that can tip markets towards more sustainable investment:

  • The United Nations Environment Programme’s Inquiry into the Design of a Sustainable Financial System.
  • The AR!SE Initiative (Private Sector Alliance for Disaster Resilient Societies), a global effort led by the United Nations Office for Disaster Risk Reduction.
  • The Investor Confidence Project, led by the Environmental Defense Fund.
  • The Banking Environment Initiative (comprising Barclays, BNP Paribas, BNY Mellon, Deutsche Bank, Goldman Sachs, Lloyds Banking Group, Northern Trust, The Royal Bank of Scotland (RBS), Santander, SMBC, Standard Chartered, Westpac).
  • The 1-in-100 Initiative, which seeks to stimulate and reward climate-resilient investment through collaboration involving insurance companies, regulators, scientists, modellers, accounting professionals, investors and other stakeholders.

More than 40 heads of state and government, as well as 2,500 leaders from business and society will convene at the 46th World Economic Forum Annual Meeting, from January 20-23. The theme of the event is ‘Mastering the Fourth Industrial Revolution’. Link