Climate change is the new state of normal and cannot be ignored.
In a webinar on the subject, Susanne Perneby from FCG, and Johanna Nilsson Palm and Malin Lindfors Speace from Ethos International, discussed climate risks, what are they, and their implications for the financial markets moving forward.
Generally, climate risks are separated into two main areas: physical risks and transitional risks. Physical risks include both sudden and slower events, from extreme weather events to biodiversity loss and how this can create financial risks. An example of a physical risk is what happened in the agricultural sector during the warm summer of 2018, when the crops were damaged from the drought and farmers’ income drastically decreased, leading to credit loss for lenders. Transition risks, in turn, means the risks arising from moving towards a low-carbon society. They include i) regulatory risks, arising from new policies and legislation ii) market risk, e.g. lower demand on products associated with high emissions, iii) technology risks, e.g. companies having to invest in new, low-carbon technology and iv) reputational risks, e.g. for companies with high carbon emission which could also be counted as a liability risk .
In recent years the financial sector has been identified as a key industry by EU and UN when moving towards a low-carbon economy, as regulation in the financial sector also implies regulation of other sectors, e.g. the firms owned by fund companies. Much is happening in the area of climate risks in financial markets, and both guidelines and recommendations as well as legal requirements are being launched – and there is more to come.
The EU taxonomy on the first two objectives, which classifies sustainable activities, will become effective from December 2021. TCFD, a tool for financial firms to report their climate-related risks, were launched 2017 and there is a strong indication that TCFD-reporting will become incorporated in legislation in a near future. Credit institutions will by June 2021 be required to incorporate ESG factors in their credit assessment, which will require new metrics and scenario analysis.
For the financial sector, being an important part of the transition towards a low-carbon economy, the risks arising from new regulation becomes one of the most prominent challenges. This includes new compliance requirements as well as measuring sustainability risks. If you would like to continue the discussion or have any further questions don’t hesitate to contact us.
 Task Force on Climate-related Financial Disclosures