Gauging Financial Awareness
60
The world today is more aware than ever of the dangers posed by climate change, yet the global financial system is struggling to incorporate its financial risks into everyday decision making. The 2019 Global Climate Index (GCI) revealed a worrying gap between the progress made in global efforts to address emissions and the lack of investment in climate initiatives. Despite increasing reports of climate-related financial losses, the number of financial services firms that have evaluated the potential financial impacts of climate change on their own businesses remains low.
As a result, gauging the real financial awareness of climate change among financial institutions is a key component of the fight against global warming. Financial awareness is the understanding that climate change is a financial issue, and the ability to identify and address the risks of a changing climate. By strengthening the financial services industry’s awareness of the impacts of climate change, financial service providers can improve their ability to assess and manage climate-related risks and seize the opportunities to invest in green technologies and resources that are needed to address the climate crisis.
Where are Financial Services Currently on Climate Change?
According to the 2019 GCI, 81% of global financial regulators have incorporated climate-related issues into their regulatory frameworks, but only 15% of financiers have taken steps to assess the financial impacts of climate change on their own businesses. Additionally, the research revealed that only 20% of financial institutions have screened investments for climate related risks, and just 7% have set internal climate-related targets.
Although global regulators have made progress in incorporating climate-related risks into their financial systems, regulators and financial institutions have yet to adequately measure and address these risks. As a result, there is a dangerous lack of transparency and accountability in the financial system that is leaving the planet and its people exposed to the risks of climate change.
Assessing Financial Awareness of Climate Change
In order to adequately understand the financial implications of climate change, financial institutions need to be able to assess their own financial awareness of climate issues. To do so, financial institutions should assess their understanding of the following climate-related topics:
Sustainability & Risk Disclosure
Financial institutions can assess their current level of financial awareness by evaluating the level of information they currently provide about sustainable investments and climate-related risks in their financial reporting and investments. This should include an assessment of the degree to which investments and services are adequately disclosed, and how financial institutions are actively engaging in measuring and reporting on their own sustainability goals.
Climate Risk Management
To effectively manage their financial risks associated with climate change, financial institutions must be able to identify, quantify, and address potential climate-related financial exposures. This should involve an analysis of the processes, practices, and tools used to identify and manage climate risk, as well as the commitment of resources to actively manage and mitigate financial risks associated with climate change.
External Climate-Related Considerations
In addition to assessing the degree to which financial institutions are actively managing their financial risks associated with climate change, financial institutions should also evaluate their understanding of the external considerations related to climate change. This includes an understanding of the macroeconomic, policy, market, and social changes in the global regulatory environment, and the potential impacts of climate change on their operations, customers, markets, and stakeholders.
Benefits of Climate Change Awareness
By evaluating the level of financial awareness of climate change among financial institutions, they can be better prepared to meet the climate-related challenges they face. This can also be a cost-saving measure for financial institutions, as they can reduce the likelihood of financial losses due to climate-related disasters. Additionally, financial institutions can gain a competitive advantage in the global marketplace by leading the way in effectively assessing and managing the financial impacts of climate change.
As the world continues to grapple with the impacts of climate change, financial institutions must commit to deepening their understanding of the links between climate change and finance. By assessing their current level of financial awareness of climate change and actively managing their risks, financial institutions can better position themselves to succeed in a rapidly changing macroeconomic environment and to support global efforts to address the climate crisis.
In conclusion, gauging the financial awareness of climate change among financial institutions is an essential step for the world in its fight against global warming. By assessing the adequacy of financial services firms’ understanding of climate-related risks and opportunities, the industry can improve its ability to protect and capitalize on the opportunities of a new global climate-focused economy.
