香港地球之友綠色金融顧問Michele Leung / Michele Leung, Green Finance Advisor of Friends of the Earth (HK)
The Central Banks and Supervisors Network for Greening the Financial System (NGFS) is set up by a group of Central Banks and Supervisors with the aim to accelerate work on climate and environmental risk management. In its First Comprehensive report launched last April, it stated that climate change is a source of economic and financial risks. Recently, European Union published its European Green Deal which stated as its new growth strategy, it also targets to become the world’s first climate-neutral continent by 2050. In the meanwhile, Bank of England circulated a discussion paper setting out the proposal for the 2021 Biennial Exploratory Scenario on climate-related risk, with the objective to test the resilience of the largest banks, insurers and the financial system to different possible climate pathways. Please refer to this link for an overview on related global policies.
How climate change is related to financial risk? In simple terms, extreme weather events would disrupt supply chains and increase business costs, which will impact the pricing of financial assets in capital markets. Hence, climate change is undeniably one of the most imminent source of financial risks for both investments and businesses. According to IEA and IRENA (2017), the estimates of losses from transition risk would reach up to USD 20 trillion when looking at the economy broadly. Regrettably, not many people are aware of or paying enough attention to climate change.
In Hong Kong, SFC published the Survey on Integrating Environmental, Social and Governance Factors and Climate Risks recently, in Asset Management, and stated that majority of asset owners expect asset management firms to identify, assess and manage climate risk. Nevertheless, only 23% of the 660 asset management firms have process in place to manage the financial impact of physical and transition risks. It also cited “discussion of climate risks is almost non-existent in client engagement and suitability assessment.”
The gap would potentially be bridged by better disclosures and deeper understanding on the associated risks and impacts from climate change. Thanks to the regulatory efforts, the disclosure requirements have been enhanced and transformed from largely qualitative to quantitative disclosure. On the other hand, businesses should start looking into their own operations and analyze their supply chain and downstream impacts, i.e. are their businesses subject to increasing carbon cost or are they operate in regions that are prone to physical risk like drought or flooding? After understanding and recognizing these risks, they would further assess and quantify them in financial terms. On the investment front, asset owners, asset managers, investment managers and banks should all work together to evaluate their environmental and climate related risks on portfolio-level. They should start measuring the risks, establish metrics and targets, then engage and implement their own climate change policy.
On top of these, and undeniably, the regulation will play a foundational and distinctive role in facilitating and supporting effective climate change policies and integrations.