WHY CLIMATE CHANGE PRESENTS FINANCIAL RISKS
Until relatively recently, climatic change has sparked a number of arguments among various professionals and investors and has constantly topped the list of ESG (environmental, social, and governance) debates. Climatic changes, also known as global warming, is the periodic change in the climatic conditions of the earth as a result of a change in the atmospheric temperature. The financial risks that are experienced as a result of climatic change can be grouped as either transitional or physical risks. Physical risks are expected to occur in the future by most professionals and investors. However, the recent fires in Australia gave an overview of what is expected in the future in the event that climatic change is not tamed. The physical risks can be categorized as either acute or chronic. Acute risks ate the point-in-time risks that are often generated by events such as cyclones or floods.
On the other hand, chronic risks result from evolving climatic conditions. The direct impacts of climatic change on financial stability include but not limited to flooded and burned commercial lands, destruction of residential and commercial real estate, increased burden on insurance companies, and bankruptcies of various firms in the financial sectors. Transition risks are often realized before the financial impacts of physical risks. This is because the government and other private investors spend a fortune in addressing and mitigating the risks that may arise from a climatic change in the future. As a result, there may be significant changes in technology, policies, and the behaviors of both investors and consumers. Consequently, this may greatly affect how various assets, industries, and properties and valuated as well as affecting the overall market reputation of the products. The risks that are accrued from climatic change are different from the traditional/conventional risks since they are not priced or captured by markets. This is because climatic change is an unprecedented phenomenon; hence no record or experience exists as to how to mitigate the risks arising from the same.
THE PRINCIPLES FOR RESPONSIBLE BANKING WERE PUBLISHED IN NOVEMBER 2018. EXPLAIN WHAT THESE PRINCIPLES ARE TRYING TO ACHIEVE AND WHAT CHANGES MIGHT BE SEEN IN THE BANKING INDUSTRY IF A LARGE NUMBER OF BANKS SIGN UP TO THE PRINCIPLES. WHAT STEPS, SUCH AS CHANGES TO THE INCENTIVE SYSTEM, MIGHT A BANK TAKE TO ENCOURAGECONFORMANCE WITH THE PRINCIPLES RIGHT ACROSS ALL AREAS OF OPERATION.
The principles for responsible banking are aimed at defining the banking industry’s role and shaping a sustainable future. The principles will ensure that banks align their businesses with the objectives and goals of Sustainable Development Goals (SDGs) and the Paris Climate Agreement. There will be tremendous changes in the banking industry if a large number of banks sign up to the principles. The principle will ensure responsible banking in that banks will create value for both of their shareholders and society as a whole. The banks will be forced to be accountable for their environmental, social, and economic impacts in the society by addressing their negative impacts accordingly and scaling up their positive impacts to align with the international sustainable development and climate targets. A bank should ensure it operates with utmost transparency across all of its areas of operations to ensure that the set standards and the principles for responsible banking are adhered to. The measure of transparency ought to account for the value of shares for each shareholder, the goals and objectives of the bank, the key stakeholders in the bank, the current price of a single share, displaying hidden charges in terms of interest and borrowing and how the bank ensures environmental stability. This will ensure that the banks achieve sustainability in the banking industry, regardless of their size.