Global Risk Institute Releases New Report on Climate Change

Climate change report reinforces why financial institutions must act

Toronto, ON (July 15, 2016) – Global warming adds significant new risks for the world’s banks, insurers and pension funds, warns a new study by the Global Risk Institute.

“Given the financial service industry’s heavily integrated role in society, it is particularly susceptible to the risks associated with climate change,” the study notes. “It must therefore ensure that proper climate change strategies and risk management procedures are in place in order to remain viable.”

The study, Climate Change: Why Financial Institutions Should Take Note, is authored by Prof Thomas Coleman, Chief Research Officer at the Global Risk Institute, and Alex LaPlante, Research Associate at the Global Risk Institute.

The report examines global warming’s impact on three key groups of financial institutions:

  • Banks: Many of the world’s largest banks have not adequately accounted for climate change in their long-term business strategies and risk management processes, and none has yet disclosed a comprehensive carbon footprint analysis. The report recommends that banks consider rebalancing their loan portfolios by scaling back exposure to high carbon industries and other assets that could suffer from global warming, while pursuing new “green” opportunities in commercial and investment banking.
  • Insurers: Losses incurred by insurance companies from storms, floods and other weather-related disasters have jumped over the past decade from about $10bn to $50bn a year, adjusted for inflation. The study notes that, as time goes on, climate change may undermine the soundness of insurers’ current catastrophe models, as well as diminish the effectiveness of existing portfolio diversification and risk transfer practices. On the brighter side, advances in clean technology and low-carbon infrastructure will open up new sources of premium growth through products such as renewable energy project insurance. Similarly, new insurance products related to public policy risk, such as protection against the unforeseen withdrawal of environmental subsidies, could generate extra revenue.
  • Pension funds: To fulfill their fiduciary duties, pension funds must manage their investments with loyalty, care, and prudence for the well-being of their beneficiaries. That responsibility requires them to avoid undue risks, including those of an environmental or social nature. As the report notes: “The duty of prudence requires a comprehensive and judicious evaluation of all pertinent information on which fiduciary decisions are to be made.”

Richard Nesbitt, the Global Risk Institute’s chief executive, said: “This paper is part of our work to support the global financial services industry in identifying and managing emerging risks. There is no question that climate change and the reaction to it will have a material impact on financial institutions. In fact, many have already begun to feel it.”

The institute is sponsoring two research projects in 2017 and 2018 to help financial institutions understand and mitigate the risks posed by climate change. One project will assess publicly traded portfolios that provide hedges against environmental risk, and design appropriate hedging strategies. The other aims to devise a government-led investment strategy that will minimize climate-change risk, while still achieving a targeted growth rate in national output.

The full climate change research report can be found on the GRI website.

About GRI

The Global Risk Institute is the leading forum for ideas, engagement and building capacity for the management of risks in financial services. We are a non-profit, public and private partnership with 34 government and corporate members from asset management, banking, insurance and pension management. The institute’s goal is to develop fresh perspectives on emerging risks, to engage members, and to enhance risk-management skills. Our activities support academics, corporations, policy makers and regulators. We take a global view of the risks facing the financial services industry from our base in Toronto, Canada.

Source: Global Risk Institute