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Carbon Risk Assessment in the Financial Sector

The SSC Team August 4, 2015 Tags: , , , , , , , , Strategic Sustainability Consulting No comments
By: Mirele B. Goldsmith How can financial institutions and individuals factor climate change into their decisions about investments?  This question was considered at a meeting hosted by Moody’s Investors Service on Paving the Road to Paris COP21: Discussing Carbon Risk Assessment Strategies on July 27, 2015.  (The list of speakers may be found here.) Those of us focused on sustainability are well aware that over time climate change will impact every aspect of the economy.  The finance sector is facing this fact now that governments are beginning to introduce regulation requiring disclosure of the risks that climate change poses to investors. At the meeting there was a lot of talk about France, where legislation has just been proposed to require disclosure of climate risk.  China is also considering legislation.  The European Union already requires pension funds to consider climate risk.  The SEC requires that companies disclose material risks from climate change, although the speakers described this requirement as “toothless.” What risks could climate change pose to financial returns?   The most obvious risk is that companies will be impacted physically (operator risks) and investors will bear the costs. The risk that seems to be most on the minds of experts is changes in policy.  As one speaker put it, “it is becoming more expensive to pollute.”  Changes in technology which may make businesses obsolete or lead to falling prices are another risk.  And there are reputational risks. Much of the meeting focused on just how the financial risks of climate change can be quantified.  The two big sources of uncertainty are first, that we don’t know how much and what kinds of actions will be taken to mitigate climate change.  And second, we don’t know how much the climate will change.  Risk projections are usually informed by past experience, but there is no historical data that can be used to build and test models of climate risk. The speakers presented several tools that are designed to help investors at various levels incorporate climate into their risk assessments.  Speakers from the World Resources Institute and UNEP Finance Initiative gave an overview of their Carbon Asset Risk Discussion Framework.  The framework, which provides questions to ask but no answers, provides a structured approach to assess exposure to climate risk, valuate, and manage it.  Mercer has released a report on Investing in a Time of Climate Change that is meant to help investors assess their portfolios using four climate-risk factors to assess exposure under four possible climate scenarios.  Mercer’s approach is more user-friendly because it provides answers based on assumptions about how investments in certain sectors and regions will be impacted under specific scenarios.  However, given how much is unknown, this approach obviously requires making a lot of assumptions.  2 Degrees Investing Initiative has worked with UNEP Inquiry and CDC Climat Research to produce a review of various approaches to carbon risk assessment: Financial Risk and the Transition to a Low Carbon Economy.  The Bloomberg Carbon Risk Valuation Tool (available to Bloomberg subscribers) was also mentioned in passing. This meeting was focused on technical questions about how to assess climate risk in order to protect financial institutions and individual investors. However the speakers also alluded to the critical need to mobilize the influence of financial markets to accelerate action to mitigate climate change.   On this point, speaker after speaker emphasized the issue of the difference in time horizons for investment decisions and the major risks to investments from climate change.  Most investment decisions are made for 2-10 years, while these experts expect to see major impacts on investments from climate change only in 25-30 years.  In order to leverage the power of markets to address climate change something will have to change. Mirele B. Goldsmith is an environmental psychologist, program evaluator, and activist.  She is an expert in how to change human behavior – the key to solving environmental problems and building a sustainable future.  Mirele’s clients include community-based organizations, associations, and businesses, that are engaging employees, tenants, board members, and constituents, in saving energy, reducing waste, educating about sustainability, and advocating for change.  Mirele is a certified SSC Green Auditor and the principal of Green Strides Consulting.

How to Get Your Company Moving Towards Sustainability

The SSC Team July 9, 2015 Tags: , , , , , , , , , , , , , , , , , Strategic Sustainability Consulting No comments
By: Alexandra Kueller Unless you’ve been living under a rock, you probably have noticed that “sustainability” is one of the biggest buzzwords today, especially within companies. Everyone is trying to be the most sustainable or have the best sustainability initiatives or be the most innovative. But what are you to do if you notice your company is lagging behind? Just ask. Thomas Smale, whose article “7 Reasons Why 'Just Ask' Is the Best Negotiation Tactic” was published on the Entrepreneur website, discusses how asking a direct question can lead you to effective negotiation. Keeping Smale’s points in mind, we added a little sustainability twist to help your company move towards sustainability.

1. Get a firm “yes” or “no”

Start by asking a direct question. “Has our company ever been involved in sustainability?” “Is sustainability something important to the company?” Get a feel for the climate and begin to lay your groundwork.

2. Provide information

When talking with your boss about sustainability, come prepared. Maybe you want to start small and implement office recycling. Research the cost, benefits, implementation time, etc. so when you talk to your boss, you can paint a better picture to allow them to understand every aspect of your request.

3. Get the negotiation back on track

Every conversation and negotiation can get off track. If you notice that happening, ask a more personal question related to sustainability, such as, “Do you have any concerns about having a sustainability strategy in the office?”

4. Gather missing information

You’ve done research on your end, and you’re ready to talk to your boss about sustainability. But even the most prepared people don’t have all of the information. By asking direct questions, you can start to fill in gaps on why sustainability isn’t a big priority in the office.

5. Get other people involved in the discussion

By asking a question, you’ve now cornered your boss into having a conversation about sustainability. From there, they might know other people who are interested in the topic as well. If you don’t ignite the conversation, you might now know where it could lead!

6. Come to a firm agreement

The right questions can lead you to a firm agreement. Find out if there are any resources that will allow you begin small sustainability-related projects around the office or see if you can present this topic to more people in a few weeks. Looking for ways to become a better sustainability consultant? Check out our blog post that talks about 8 steps to improving as a sustainability consultant!