Climate Change is real and so are the risks that range from food security, drought, supply chain issues etc. Are these risks borne by municipalities and businesses appropriately recognized and priced into the marketplace for financial instruments?

In a broad sense climate change represents a systemic risk as it is so interwoven into many global systems, including financial. Many experts believe these risks are pervasive enough to disrupt the entire financial system.

Standard and Poor Global Credit shows if global warming does not stay well below 2 degrees Celsius by 2050, up to 4.4% of the world's GDP could be lost annually. If adaptation isn't adopted, this will disproportionally affect developing economies. We find lower-income countries are 4.4 times more exposed to climate risks than wealthy countries.

If climate change is not addressed, the impact to business operations, short term to long term, can have real implications on the value of a company. The result can be lost revenue due to impaired operations or a reduction in consumer demand for carbon intensive companies in any industry.

According to a 2022 Brookings Institute report, 93 percent of global asset managers believe climate-related financial risk “has yet to be priced in by all key financial markets globally.” Many of the world’s largest asset managers have called for strong, mandatory climate disclosure rules to improve their ability to prudently manage investments.

It is “easier” to measure traditional risk calculations and assessments such as interest rates, inflation, and company fundamental metrics.

The pathways of climate change and the risks interwoven into businesses and communities is very difficult to calculate. But it is real. And if you invest in companies or even municipal debt, your financial advisors should have a rigorous screening system for your portfolio.

Tom Koehler
Director of Climate Action