This Guest Post was Contributed by Mercedes Arango*
In the last days, nine investment group leaders, including la Caisse de Dépôt et Placement du Québec (CDPQ), in partnership with UN Environment Finance Initiative (UNEP FI) created a workgroup to promote climate transparency in the financial markets, based on the recommendations of the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD).
This action follows a worldwide trend on sustainable finance and responsible investing. The financial sector can contribute to sustainable economy by reducing vulnerability and increasing resilience of investment portfolios exposed to climate-related risks.
Even though some investors recognize the financial risks tied to climate change, there is neither clarity nor consensus on how these risks should be managed and communicated. Moreover, even if investors feel public pressure concerning how ‘clean’ their investments are, it is not clear how to measure the real impact of climate change on financial assets.
Last June, the Task Force on Climate-related Financial Disclosure launched its recommendations regarding climate-related financial disclosure, lobbying for greater transparency on the exposure of investments to climate change. Michael Bloomberg, Chair of Financial Stability Board stated that “increasing transparency makes markets more efficient and economies more stable and resilient”.
The TCFD classifies two major risks related to climate change: risks related to the transition to a lower carbon economy and risks related to physical impacts of climate change. Indeed, new legal and regulatory frameworks, clean technology, and natural disasters caused by abnormal weather patterns could contribute to disruption of the financial market.
The question now is: are investors aware of their exposure to these risks?
It is expected that the long-term assets are more sensitive to climate-related risks. However, a short-term investor can equally be affected by new technology, policies, and natural disasters. It is critical to measure and assess climate-related risk in order to be prepared for investment conditions in the future.
Questionable corporate governance practices and opaque information contributed to the financial crisis in 2007-2008. Surely, being prepared for climate change will help avoid the next financial crisis.
*Mercedes Arango is a certified project manager and lawyer in Peru and France with over five years of international experience implementing sustainability and economic development projects in Latin America and Europe.
At the same time, she has extensive experience working with private companies identifying business opportunities in the clean energies sector in Peru and building long-lasting relationships with key stakeholders.
Mercedes speaks English, French, Spanish, and Italian.