Risky business: Why 1.5-aligned strategies are key to preserving capital

Channels: Debt, Equity, Policy, Stranded Assets

Companies: EIT Climate-Kic

People: David Lunsford, Srini Sundaram, Kirsten Dunlop

Decision-makers with responsibility for capital need to make bold, upfront investments in innovative sustainability solutions to limit climate change. An improved understanding of physical climate risks can help make this 'strategy overhaul' happen

Climate change is already starting to manifest through physical risks such as floods, wildfires and hurricanes. This, in combination with the need to get to net-zero emissions as quickly as possible – globally by 2050 at the latest and much earlier in richer nations – means investors and businesses will need to understand how to incorporate climate risks into their investment and strategic decisions.

Investors are already taking action. The UNEP Finance Initiative's Investor Agenda, developed with a number of partners such as the PRI, CDP, IIGCC and Ceres, aims to help large institutional investors improve their reporting on climate risks and scale up investment needed to meet global climate targets.

Regulators are also making efforts to address climate risk. Last month, the UK's Prudential Regulation Authority (PRA) published a draft supervisory statement saying insurers and banks should strategically manage and report their climate risks, using scenario analysis.

The Task-force for Financial Disclosure (TCFD) recommendations are also pushing climate change higher up on investors' agendas. The recommendations "have been a huge boom launching this discussion among institutions that never talked about climate change at all", says David Lunsford, Co-Founder and Head of Development at Carbon Delta. The EIT Climate KIC-supported company has developed the Climate Change Value at Risk (Climate VaR) evaluation tool identifying how much a company's value is affected by climate change.

But Lunsford highlights the TCFD recommendations are still voluntary and might not "have a real bite". The introduction of mandatory climate reporting, calls for which were rejected by the UK government and has so far only been implemented in France through Article 173, "would be the real proof in the pudding", he adds.

Companies and cities can already get an understanding of the risks they are facing should TCFD disclosure become mandatory, through the CDP-led project Reimagining Disclosure, also supported by EIT Climate-KIC.

Regulatory initiatives help to put climate change on the agenda but "we need a lot of work on how to mobilise the capital and the use of financial instruments" to drive the investment needed to manage and prevent climate risks, says Srini Sundaram, CEO of technology company Agvesto. The company provides data on portfolio exposure to climate and weather risks in agriculture and helps financial organisations develop risk transfer strategies.

Making investors aware of climate-related risks and how to manage them will likely play a huge role in accelerating the capital required to mainstream climate change into the financial system.

Enormous amounts of upfront capital, rather than incremental investments, will be needed to back innovative solutions and partnerships that can help limit climate change to 1.5C above pre-industrial levels, says Kirsten Dunlop, CEO of EIT-Climate KIC. A better understanding of climate risks should help trigger this transformation, she adds.

"If you show decision-makers with responsibility for capital that if they don't act now they'll either be faced with new needs that will be met by others or they'll have stranded assets, then it begins to look like a wise business decision to invest upfront to manage the strategic risk," says Dunlop. "And that's where you begin to unlock the interest of organisations that understand sustainability comes with adjacent benefits, and it's best to be involved and benefit from this early on."

This is echoed Lunsford who says: "If physical climate extremes start to get really bad and this results in a knee-jerk reaction from politicians that then kicks in a 1.5C scenario, you will really feel this if you've not taken early action."

"There's plenty of low-hanging fruit and plenty of ways to rebalance your portfolio," he says.

Climate risks and how to address them will be explored at next week's Mission Finance Climate Innovation Summit, hosted by EIT Climate-KIC in Dublin on 6-8 November. Themes include the legal and financial risks of getting to net-zero and how to make financial decisions that incorporate physical climate risks.

To register for the Climate Innovation Summit please click here