Could climate risk pose the next threat to financial stability? This is a very possible scenario, according to MEP Arlene McCarthy, who is a member of the High Level Expert Group on Sustainable Finance and a former vice-president of the European Parliament’s Economic and Monetary Affairs Committee.
In an article published on Euractiv, McCarthy writes that not just the physical effects of rising sea levels, drought and extreme weather, but also the investor rush away from fossil fuel companies, could all raise the prospects of “massive financial losses”, to governments, investors and corporates.
Proactive not just protective
There is now solid scientific research that points to climate change and its effects. And the G20 has been advised – by the Task Force on Climate-related Financial Disclosures – to require corporates to include climate risk disclosures in their annual financial reports. CTMfile covered this development here: How July’s G20 will change risk reporting for corporates
Investment in clean energy is of course vital to fighting climate change and pollution. But corporates shouldn't only be thinking in terms of protecting their businesses or capital from the financial and physical risks of climate-related events and the rush to clean energy. They should also be thinking in terms of actively selecting to do business with those companies that are pushing the sustainable, clean energy agenda.
Imperatives for sustainable finance
McCarthy highlights the role of the European Commission’s High-Level Expert Group on Sustainable Finance, which published an interim report last week. The report sets out some of recommendations and priorities for changing Europe’s financial system, including:
- improving disclosure and assessment of long-term sustainability risks such as climate change;
- ensuring capital is delivered to the businesses and projects that can build a sustainable economy;
- better sustainability related disclosure by the financial sector and labelling financial products;
- directors and investors to be compelled to manage long-term sustainability risks;
- changes to the regulatory system to encourage green investments while penalising ‘brown’ ones;
- ensure that players in the financial sector understand, and communicate, the climate risks that they face;
- greater engagement with society at large: many of the problems in the financial system in recent years have their roots in the gap between how the system operates, and the needs of consumers, citizens and business.
CTMfile take: Arlene McCarthy talks about “a reboot of the financial system” and says that “a revolution is already underway”. Are corporate treasury professionals out there already trying to mitigate against climate change-related risks? And – much more importantly – are sustainability and environmentally-protective practices already being prioritised by your company?
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