Risks, Opportunities, and Investment in the Era of Climate Change
On March 4, I joined alumni at Harvard Business School’s Program on Business and The Environment to discuss climate risk to investment value and consider what can be done about it. Speakers came from as far away as Japan (Hiro Mizuno, CIO of Japan Government’s $1.6 trillion Pension Investment Fund) and as close by as Boston (Ron O’Hanley, CEO of State Street Corporation, a national leader in ESG investment and their investment division is the world's third largest asset manager). I was encouraged by the ‘multi-generational’ investment horizon of Japan’s Government Pension Fund, and by Mr. O’Hanley’s consideration of climate risk to State Street Corporation’s investors, as well as the corporation itself and its broader community.
Robert Litterman (Risk Committee Chair of Kepos Capital and board member of Resources for the Future, Climate Leadership Council, and WWF) reminded us that the role of risk management is to price in worst-case scenarios. He has studied approaches and benefits to putting a price on carbon to accelerate a transition away from fossil fuels, which is recommended by the Climate Leadership Council comprised of industry and investment leadership (for additional information, the World Bank provides overview of carbon pricing instruments). By pricing climate risk, the capital markets drive industry transitions toward a future that will benefit both economies and communities. As described in this article in Financial Times, there may be transitional risk in regards to stranded assets.
The situation is urgent, as expressed in the recently released Climate Change Evidence and Causes Update from the Royal Society and U.S. NAS (National Academy of Sciences) which was coauthored by Greenleaf board member Dr. Don Wuebbles, a leading atmospheric scientist. Potential tipping points and high-risk abrupt changes (e.g. thawing of the permafrost) that could lead to dire consequences are not yet included in climate models but cannot be ruled out (NAS, 2020 question 19). Kevin Stiroh of the Federal Reserve Bank of New York spoke to physical and transitional risks facing financial markets. It is significant that financial regulators in the US are taking heed given the potential systemic risk to the economy. You can find Mr. Stiroh’s formal comments here.
To incorporate climate risk requires understanding the potential impacts of various climate scenarios across geographies as well as industry sectors. This enables individual and collective response for mitigation and adaptation via policies and practices. Greenleaf board member, Dr. Don Wuebbles, Atmospheric Scientist at the University of Illinois, is working with industry leaders and policymakers to understand and incorporate climate projections for downscaled scenarios.
The investment community is in a position of great influence to mitigate climate change to benefit society. Many also spoke of the need for public policy to protect our common interests. When private and public sectors engage collaboratively great progress can ensue, which on climate change is needed now.
John A. Andersen, Jr.