Source:  United Nations – Climate Action 

Climate action must become the core focus – for both government and corporations. Smart businesses and investors are already moving to price climate risks better. But governments must do more.

The Secretary-General recently told ministers, “The COVID-19 crisis is having devastating impacts because of our past and present failures.”

These failures include not taking the Sustainable Development Goals seriously enough, not heeding warnings about the damage we are inflicting on our natural environment and taking risks with climate disruption. “We put up with inequalities within and between countries that have left billions of people just one crisis away from poverty and financial ruin. We have not invested adequately in resilience – in universal health coverage; quality education; social protection; safe water and sanitation. We have yet to right the power imbalances that leave women and girls to constantly bear the brunt of any crisis.”

Assessing the size of climate-related risks on the financial system, requires developing new analytical tools that, for example, integrate climate scenarios into regular “stress tests.” Stress tests are already conducted by regulatory authorities to assess the resilience and strength of banking institutions in adverse situations.

Central banks and financial supervisors must ensure that climate-related risks are well incorporated into individual financial institutions’ strategies and risk management procedures. While voluntary disclosure of climate-related risks in line with the guidelines of the Task Force on Climate-related Financial Disclosures(TCFD) is a necessary first step, it is increasingly urgent that this becomes mandatory to strengthen and systematize the integration of climate-related risks.

Financial institutions should better understand climate-related risks and consider them in their risk management procedures and investment decisions, as well as in their longer-term strategies. The changes in climate policies, new technologies, and growing physical risks will prompt reassessments of the values of virtually every financial asset, and firms that align their business models to the transition to a net zero world will be rewarded—while those that fail to adapt will be heavily penalized.

There has been a surge in interest from companies in adopting sustainable business plans and science-based targets that are compatible with a 1.5°C scenario, yet with a few notable exceptions, markets and major financial institutions have yet to take climate related risks seriously.