Systemic Climate-Related Financial Risk and The Slow-Boiling Frog
The drum beat continues. The climate news in the last month has been sobering - as it was in the prior month, and the month before that. As my friend and colleague, Tim Mohin, discussed in his newsletter last friday, the IPCC report issued April 4 is an urgent call to action. The report’s title gives away the punchline: “The evidence is clear: the time for action is now.”
Prudential regulators around the world similarly are sharpening their focus on the systemic economic effects of climate change. In the last month, regulators, including the Financial Stability Board and the European Central Bank, and government agencies in the United States, Canada, France, and the UK have all implemented programs to address climate-related threats to their financial systems.
Many companies have found it difficult to make the connection between climate change and financial risk. There is evidence of a disconnect. This isn’t altogether surprising.
Climate change poses complicated challenges, which are made worse by the combined tragedy of the commons and tragedy of the horizon. Company boards and management have acted in what they have judged to be their shareholders’ best interests, even when their actions contributed incrementally to the collective climate crisis. This collective action problem has been amplified by companies’ motivation to enhance value in the short term even when today’s actions will have an adverse future impact. Climate change has, for many companies, felt complicated, remote, and disconnected from the important work of running the business.
In the last decade, many companies have responded to external pressure to address climate change and other sustainability issues. A typical response has been to form a sustainability team charged with preparing a sustainability report and perhaps leading other efforts to “green” their companies.
The problem is that these efforts typically lived in silos far from the boardroom or the CFO’s office. Sustainability was a thing “over there” and largely disconnected from core company strategy. Many companies seem to have had a general awareness of climate change but without appreciating its significant financial implications for their businesses and long-term prospects. They have been the slow boiling frog.
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Wyatt joined Persefoni from the U.S. Securities & Exchange Commission (SEC), where she served as Senior Counsel for Climate & ESG to the Division of Corporate Finance, led the rulemaking team through drafting proposed climate disclosure regulations, and worked closely with the Office of International Affairs.
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