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How Climate Change is Impacting Investment

March 23, 2021 by Victoria Turner
Trader Michael Gallucci works at his post on the floor of the New York Stock Exchange, Wednesday, March 11, 2020. (AP Photo/Richard Drew)

WASHINGTON – Emma Howard Boyd, chairwoman of the United Kingdom’s Environmental Agency, would like you to invest your pension in environmentally-friendly financial funds, she urged today during a Peterson Institute for International Economics event entitled, “Economic Impact of Climate Change.”

Not only do these types of pension funds lay the foundation for economically sound businesses with programs that are tackling the uncertainties of climate change, but more everyday investors want to make sure that their investments are reflecting their values, she added. Research shows investing in these funds reduces a person’s carbon footprint 27 times more than becoming a vegan who boycotts flying, she said.

“We must lay the first stone down without knowing exactly how to construct the ceiling,” she added, noting that the UK’s environmental agency uses the country’s economic activities as a “laboratory” to find new ways to address both the current and the growing impact of the climate crisis. 

“We need to mobilize the finance industry to get behind the change on the ground,” added Howard Boyd, and incentivize them to “shift to greater resilience” to create a “hospitable” future.

Just last year, investments in these environmental and socially responsible funds were close to $350 billion, more than doubling the $160 billion in 2019. And in the latest round of budgeting, the U.K. has pledged nearly $14 billion to create a national infrastructure bank that will support investments in projects addressing climate change.

These  “green banks,” she explained, are imperative for ensuring that countries have access to “climate finance” both on a national and international scale while still owning their projects, but abiding by goals set in the 2015 Paris climate agreement. Across the world, she said, there are still only 27 green banks in 12 countries. 

In order to meet the “climate shocks” of the future, she said, environmental, economic and financial regulation need to walk in “lockstep.”  

But what is climate finance and what are its risks? The everyday person can understand how devastating a natural disaster can be to a community, from housing loss to death. However, for financial institutions like banks the impact is seen differently, according to Kevin Stiroh, senior advisor to the Division of Supervision and Regulation of the Federal Reserve Board. It comes in the form of a reduction in available cash flow or collateral for borrowers, he explained, or reduced company value through losing assets in a natural disaster. All these cause strain on banks´ ability to fully provide the financial services offered while they figure out how to include these new “climate-related financial risks” into their strategies and create new business models that can withstand environmental events. 

This has led to a national and global goal of understanding these risks, which are difficult to quantify due to the overall uncertainty surrounding the time and the full extent of the environmental event’s impact. The Federal Reserve, he added, has already established a supervisory climate committee with the goal of ensuring that the firms it supervises “are

resilient to climate-related financial risks.”

As chairman of that committee, he attests to the “massive uncertainty” on key factors such as timing, policies, technological advances, and the “adaptive responses of consumers and businesses” making it difficult to understand and evaluate risk make it a complex problem. Further complication comes in implementing this understanding into the organizational structures of both the private and public sectors. 

“Shared success will require ongoing collaboration between the private and public sector to push the industry to greater resilience to the financial risks of climate change,” he said, and a  new workforce that knows how to handle these risks will need to be trained to sustain any change. 

A number of major national banks already voluntarily disclose this information, Stiroh said.  However, there is not yet a mandatory or standardized disclosure form that allows the industry to capture all the data needed to create a national or international framework. 

Howard Boyd called for a mandatory “climate emergency rider” for any commissioned work in any industry to ensure everyone is doing their part in investing in a society that will withstand climate change throughout time.

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