Communicating the financial risk of climate change

Communicating the financial risk of climate change

On April 1st, 2022, we explored what can be learned from finance professionals working to communicate the risks to peoples’ pocketbooks associated with climate change. Ivan Frishberg, Senior Vice President and Chief Accountability Officer of the Amalgamated Bank; Bianca Taylor, head of the Tourmaline Group, and Sadie Frank, Policy Program Manager at CarbonPlan, shared their insights from the field. Our own Dr. Jennifer Marlon, Research Scientist and Lecturer at the Yale School of the Environment, moderated this discussion.

Watch the hour-long discussion:

Takeaways include:

  1. It is difficult to communicate the physical risk due to climate change, which may lead to mispricing and misleading investors. There are systemic factors that contribute to a lack of disclosure, such as the dearth of regulations to encourage this disclosure and the fact that acknowledging more risk makes it more difficult for groups to obtain capital. Further, many municipal bond holders expect the government to backstop any costs associated with natural disasters like storms and floods, leading them to pay less attention to these risks. Additionally, most physical risk assessment is done by small, private firms, who often use opaque techniques to arrive at their conclusions, which can lead to confusion. The overall communication challenges lead to a world less certain about the future financial risks of climate change.
  2. Climate change has created systemic risk that our financial systems were not built to handle. These risks can include supply chain disruptions, the loss of physical assets and infrastructure, and disruptive (yet necessary) policy changes. These problems play out over a multi-decadal scale though, while the average corporate board member leaves after a decade, business plans last half a decade, most loans are for 3 years, and bonuses are paid annually. This mismatch of timescale encourages a status-quo orientation for financial actors. Communicating the immediate risk that climate change poses is one way to change this. Using more persuasive rhetoric about today’s responsibility for tomorrow may also help.
  3. Internationally, some have suggested that divestment from areas and institutions threatened by climate risks is a solution, yet this deprives economically vulnerable populations of much-needed access to capital. The Global South, which is significantly more threatened by climate change than the Global North, should not be deprived of investment opportunities due to climate risk, as that would be to punish them for the actions of the Global North, the primary driver of climate change. Financial professionals must work hard to persuade their colleagues of the historic responsibility that precludes disinvestment from climate-vulnerable areas.

This event was sponsored by the Yale Center for Environmental Communication at the Yale School of the Environment.