Climate Change and the Financial Sector: A Time of Risk and Opportunity

International efforts to address climate change advanced significantly in December 2015 when 195 countries signed the Paris Agreement. This signalled a collective commitment to aim to reduce greenhouse gas emissions sufficiently to limit global warming to two degrees C. While the Paris Agreement was celebrated as a political milestone, efforts to ensure the implications of climate change are integrated by the financial sector, particularly the many trillions of dollars managed by bankers, investors and asset managers, continue. The importance of financial decisions is evident from the reality that to a large degree they either make the problem worse (e.g., by continuing to increase fossil fuel exploration, production, and utilization) or support solutions (e.g., by investing in clean energy and climate resilience). Fortunately, the financial sector is waking up to climate change – first and foremost because, as recent experience shows, the impact of extreme weather events can have devastating financial as well as human impacts, thus resulting in increased awareness of “climate risks,” and initial efforts to incorporate these considerations into financial decision-making. These shifts in the policy landscape (as evidenced most clearly by the Paris Agreement, but also by green policy initiatives in some countries such as China, Brazil, Bangladesh and the UK) signify not just political consensus, but also growing momentum for action at the nexus of climate change policy and the finance, including via incentives, carbon pricing or other policy measures. Yet, outside the halls of climate conferences, the awareness about climate issues, risks or opportunities remains low across mainstream financial actors. Perhaps what is less apparent to the financial sector is that climate change is also creating enormous business opportunities – both in the form of investments that reduce greenhouse gas emissions, and more importantly, through measures, tools, services, and indeed investments that enhance climate resilience. Supportive government policies can accelerate the recognition of these risks, and opportunities and in turn demonstrate that actions to address climate change can be profitable, ideally contributing to a virtuous cycle of investments that support climate policies and vice-versa. Furthermore, these opportunities not only help to mitigate financial risks, but also address risks to the wider economy.