Climate change creates two types of potential risks for financial institutions: physical climate risks leading to physical damage to assets, and carbon risks altering the financial viability of a part of the capital stock and business models.
This report looks at how to integrate these two risks into financial risk and valuation models and it shows that there are no fundamental barriers to this integration. In addition, it underlines that addressing this challenge requires not just a focus on the models but also risk management practices.
In 2014, the UNEP Finance Initiative (UNEP FI) and the University of Cambridge Institute for Sustainability Leadership (CISL, working with and on behalf of the Banking Environment Initiative – BEI) commissioned a study entitled, “Stability and Sustainability in Banking Reform – Are Environmental Risks Missing in Basel III?”. The resulting report pointed to the material links between financial stability and environmental (and social) risks.
Since then, bilateral engagements with a number of banking regulators have taken place. In addition, an Expert Dialogue between the worlds of Science and Finance was convened jointly by UNEP FI, CISL and the UNEP Inquiry into the Design of a Sustainable Financial System (‘the UNEP Inquiry’) in April 2015, with a view to refining a common understanding of the stability-sustainability link and to exploring how this link might be addressed going forward.
This briefing provides a synthesis of the current state of thinking on the topic, based on the work above. It is intended as a means of sharing key findings with policy-makers and of engaging them on the matter.
In recent years, a plurality of different governance initiatives has emerged that are designed to expand the disclosure of environmental risk within financial markets. The emergence of these initiatives represents an important policy development, and it has the potential to reduce environmental risk within the financial sector by incentivizing investments in sustainable economic activity capable of long-term value creation. Unfortunately, environmental risk disclosure has yet to be assessed as a field of governance activity in addition to its potential effectiveness in improving disclosure within financial markets.
Ethiopia has embarked on a national strategy of building a climate-resilient green economy. This model therefore does not focus only on mitigation strategies, but it also valorises the importance of improving climate-resilience, described as the ability to anticipate and adjust to climate change risks. In particular, the need to transit to a green economy model that is more inclusive is receiving growing attention as a pathway that can lead to sustainable development.
This report explores the linkages and contribution of inclusive green economy policies and strategies to structural transformation in Ethiopia. In this regard, the report provides an assessment of how inclusive green economy-related policies can reinforce the structural transformation agenda of Ethiopia; and how structural transformation policies and strategies can enhance the development of an inclusive green economy. The intent is to enhance understanding and promote the adoption of inclusive green economy policies that will contribute to achieving the structural transformation goals of Ethiopia.
This Working Paper was commissioned by the UNEP Inquiry into the Design of a Sustainable Finance System (“the Inquiry”) to feed into its process of analysis and knowledge dissemination. This Working Paper has attempted to do three things:
1- summarise the underlying logic for why the financial sector should care about the state of the environment and environment-related risks;
2- review the main structural barriers that could prevent the financial system from managing such issues;
3- identify the main researchers and organisations undertaking work on these topics internationally.
The aspiration being that this document should be a useful initial reference guide to those concerned with both how environment-related risks could affect the financial sector and what financial institutions can do to manage such risks.