Risk management and climate change: the role of the financial services sector

Ecosystems Risk Climate change Economics Industries Financial risks Australia

The Climate Change and Risk Management: The Role of the Financial Services Sector Think Tank held on 5 December 2012 brought together members representing the financial sector, government and policy makers, climate scientists and academics to discuss the role the financial sector can play in managing and adapting to a more volatile environment and to explore how greater collaboration between the parties can reduce the total cost of adaptation.

The increased frequency of major climatic events in recent years, whether related to ongoing climate change or not, have drawn attention to the potential wealth destruction that can result from an insufficient understanding of, planning for and insuring against major climatic events.

The financial sector plays an important role in providing additional information on the short-term risks associated with investment decisions through the price signals embedded in bank loans and insurance premiums. However, these contracts are generally relatively short-term in nature and therefore fail to provide information on the potential long-term effects associated with climate change. The funds management and superannuation sectors could potentially play a role in providing additional information on long-term climate risks through their investment decisions and the subsequent effect this would have on asset prices. However, current incentive structures, which focus on the short-term performance of fund and investment managers, have potentially limited the prevalence of Environmental, Governance and Sustainability (ESG) factors in the investment decisions of these organisations.

While the factors that have led to the increased frequency of extreme climatic events remain debated, a number of initiatives can be implemented to reduce the total cost associated with events of this nature. These initiatives include ensuring that market prices of general insurance products are left unfettered and are commensurate with the riskiness of the asset being insured, the elimination of policy settings and actions that may provide incentives for businesses and individuals to take on excessive risk. Most importantly, greater collaboration by governments, scientists and the financial sector is required to ensure that high quality, fine-scale information on climate risk is made available to promote informed decision making and risk management.

A report on the outcomes of the VCCCAR-ACFS Climate Change and Risk Management: The Role of the Financial Services Sector Think Tank sponsored by the Insurance Council of Australia and the Suncorp Group.
Principal authors: Professor Kevin Davis, Research Director, ACFS, and Martin Jenkinson, Research Officer, ACFS.

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