Some Good Climate News: Financial Firms Are Getting Green-Minded

Think what we’ve endured: rising seas, monster storms, huge wildfires. Fighting climate change is a tough task. But here is some good news. A new survey finds that more and more financial firms are getting a lot better at climate risk management.

This is important for investing because many polls show that investors, particularly younger ones, consider company green bona fides in choosing where to put their money. Wall Street and other finance types have gotten the message. JPMorgan Chase

JPM
, for instance, announced in April that, over the next decade, it would invest and furnish other financial services for up to $2.5 trillion related to climate change and social inequality.

Huge institutional investors—such as BlackRock

BLK
, the Vanguard Group and the California Public Employees’ Retirement System—say they use environmental considerations in allocating their dollars, and insist on better corporate reporting of climate risk. Environmental, social and governance (ESG) precepts are increasingly important among public pension funds, university endowments and foundations. Many universities, for example, are dumping investments in fossil fuels stocks.

According to a survey from the Global Association of Risk Professionals (GARP), 90% of the 72 leading financial companies’ C-suite level executives are accountable for climate-risk assessments and management efforts. And a majority of their boards oversee climate risk management. What’s more, climate risk staffing levels have increased at 91% of all surveyed companies over the past two years, with nearly 90% of them expecting levels to rise in the next two years.

At the same time, regulators’ scrutiny is expanding, which should help companies overcome any hesitancy about getting serious about the climate. Some 65% report that regulatory bodies are requiring that they report climate-related risks. 

On the minus side, there’s a widespread disparity on climate risk measurements and tracking. With the plethora of gauges, no common ground exists on how to assess corporate efforts to combat the environmental threat. In addition, the study finds that climate risk is not properly priced. It’s either not included at all in pricing products or is included only partially.  

More and more companies are making use of what’s called scenario analysis, or employing real-world situations to figure out what they need to do.

“Over the last few years, as we’ve taken a look at climate risk management and strategies developed by financial institutions, we’re seeing that firms are evolving their capabilities in a significant way,” says Jo Paisley, president of GARP Risk Institute and previously an officer in the banking industry.

“More firms are undertaking climate scenario analysis and taking action on the back of it, though it is striking how little progress is being made embedding quantitative metrics within day-to-day risk management,” she notes. “And with few firms believing climate risk is properly priced, there is clearly an opportunity for significant changes in valuations and associated impacts on financial performance.”   

As a grim 2021 wheezes to a close, that provides some comfort.