ESG: Climate Risks in the Financial Industry

ESG, Climate Change, Finance Industry, Compliance, Risk Management

ESG: What are the impacts of climate change on the financial industry? Who is affected?

Climate change affects the financial industry, especially asset managers, banks, trustees and pension funds. Those who manage third-party assets have a fiduciary duty to consider climate risks (and opportunities) as part of their risk management.

"Beyond purely ecological and ethical considerations, trustees must also consider climate-related risk factors in their investment decision-making process from a financial point of view. There is increasing agreement on this point. (...) Climate change is already affecting investment performance. Trustees must integrate this reality into their investment decisions, address financial climate risks and exploit short and long-term opportunities. Many investors are already putting these issues at the heart of their investment process." Angel Gurria, Secretary General General OECD.

What are the financial climate risks?

Climate-related risks can be divided into two main categories:

  • Risks related to the physical impacts of climate change: floods, heat waves, droughts, etc. (physical risks)
  • Risks related to the transition to a lower carbon economy (CO2 reduction). Transition risks are divided into policy and legal risks, technology risks, market risks and reputational risks.

Voices from business and government:

"The momentum to reduce climate risk in portfolios is increasing. Owners of long-term assets fear extreme capital losses and/or "stranded" assets (portfolios that have to be written off early). Is there already a discount on the market for securities of companies that are most vulnerable to physical and regulatory climate risks? We have not seen such a discount in the past - but can imagine a discount in the future". Blackrock

"Financial institutions may argue that the timeframe for the realisation of these risks (i.e. transitional risks) is well beyond their investment horizon and the average maturity of their balance sheets. They can argue that their exposures can be progressively adjusted if necessary. In my opinion, it is illusory to think that if risks become apparent, everyone will be able to reduce their exposures simultaneously and in an orderly manner." François Villeroy de Galhau, Governor of the Banque de France

"Total losses on coal, oil and gas investments are imminent." Wall Street Journal Germany

Financial service providers are confronted with many questions:

  • How can climate risks be quantified?
  • What is best practice in Switzerland?
  • What are the legal risks for financial companies?
  • What are the regulatory risks (EU)?
  • What are the regulatory developments in Switzerland like?
  • What are the economic opportunities?
  • Legal Risk Management: What concrete precautions should be taken?

MME has produced a white paper "ESG Legal Risk Management - Financial Risks and Responsibility" with answers to these questions.

April 2019 | Author: Dr. Martin Eckert

zum whitepaper

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