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Understanding climate opportunity may help mobilise financial institutions around climate action

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Climate opportunity is a newer concept when it comes to financial assessment, and is without defined metrics, thereby involving more uncertainty than more established areas like risk and impact. However, new macroeconomic models, and robust and transparent methodologies, may empower opportunity to become the key driver of climate assessment adoption among institutions and investors, according to a panel of finance experts at COP23 in Bonn.

Metrics that help drive transparency around the levels of climate risk in companies and investments has been a major topic at COP23. By having comparable information about the exposure of investments and companies to the potential detrimental physical, reputational, litigational, etc. impacts of climate change, investors can make informed decisions on where to put their money. In this way, metrics and data that drives transparency can help shift flows of investment.

One idea raised by the panel was that of ‘climate opportunity’. While there’s currently much emphasis on climate risk—the different types of exposures of an organisation to the impacts of climate change—climate opportunity focuses on the way companies (and subsequently, investments) may stand benefit from their green practices as economies shift towards favouring clean tech and sustainability.

Innovative approaches to climate data communication and modeling

While there’s an emphasis on data in regards to financial decision-making, it’s crucial there be a process for interpreting and communicating it in an accessible way, so stakeholders may make informed decisions, says Gaël Giraud, Chief Economist, Agence française de développement.

Macroeconomic modelling could encompass national, regional, and/or global economies, with a focus on data concerning e.g. specific sectors, unemployment, markets, etc. Macroeconomic models that project climate change scenarios at both a physical and policy level—and their economic impacts—may enable governments to drive nations into a more sustainable future. This is because, as governments are increasingly committing to cleaner futures for their cities, they require data projections to reveal areas of confidence and areas of concern (for example: increasing unemployment rates in high carbon sectors) to guide their policy.

According to Irene Monasterolo, Assistant Professor, Vienna University of Economics and Business, another way to apply macroeconomic models is with climate opportunity—models that project sustainable growth, the benefits of divesting from high carbon assets to low carbon assets as well as new policy metrics. Opportunity metrics are ideally informed by synergies between the private and public sector—between financial institutions and central banks—in terms of data and best practice accessibility.

Climate risk and impact is difficult to measure—even more so for opportunity

A main challenge when it comes to climate risk and impact investing is measurability, which depends on established data and methodologies. And, the quantity and quality of this supporting information is inconsistent across sectors. For example, advanced modelling is available for agriculture since there’s an established relationship between weather and the financial risk. The housing sector may not have such developed modelling. With the increasing effects of climate change, there’s an urgent need for modelling to calculate data like foreseeable risk in coastal housing. However, there’s a tension between responding to that urgency quickly with actionable data and the need to improve on the accuracy and robustness of our current climate modelling.

“You have that trade-off between wanting precision, but there’s a bit of capacity building that’s happening with what climate modelling can actually tell you,” says Kate Mackenzie, Director – Finance, Policy & Decision Metrics, Climate-KIC Australia.

For opportunity, which is much less established as an assessment area compared to risk and impact, there is even less precision.

There are ways to develop opportunity into a strong financial assessment area

John Firth, CEO & Co-founder of Acclimatise, says while it’s currently difficult to understand the metrics around opportunity, banks can start to encourage resilience, and development banks in particular (which often already focus on climate risk, impact, and resilience) can lead the way for commercial banks: “The real game changer in terms of mobilising the financial industry is understanding opportunity.”

While access to data is an obstacle in developing models for climate opportunity, it may begin with assessing the returns of high versus low carbon portfolios. Another way to inspire confidence in climate opportunity assessments is by having very robust and transparent methodologies.

A call to change mindsets from individual to collective benefit, as well as burden-sharing

Giraud identifies another challenge: “Nobody today is able to monetise the impacts of climate change.” He adds that it comes down to people—to persuading people of the different climate risk and impact scenarios since many undervalue the costs of the ‘business as usual’ scenarios.

Thus, the key in advancing climate opportunity as an important decision and finance metric may be in encouraging commercial banks to begin doing the relevant market analysis work; this may be aligned with the sectors they’re working with.

Moreover, we may also change the way we think about benefit and burden sharing, with a more collective approach: “The benefit of financing the right project will be a collective benefit and not a benefit just for the bank,” says Rodolphe Bocquet, CEO & Co-founder, Beyond Ratings.

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