The world is warming. About that there is no doubt.
2015 was a hot year – the hottest on record. The first two months of 2016 continued to shatter temperature records. In February, we crossed the 1.5°C threshold, meaning average global temperatures that month passed what many governments say should be the limit, that of a world 1.5 degrees warmer than pre-industrial times. The National Oceanic and Atmospheric Administration (NOAA) also just reported the largest 12-month jump in carbon dioxide concentrations ever, with global concentrations rising by 3.76 parts per million (ppm) to 404 ppm. “Carbon dioxide concentrations haven’t been this high in millions of years. Even more alarming is the rate of increase in the last five decades and the fact that CO2 stays in the atmosphere for hundreds or thousands of years,” NASA scientist Erika Podest said in a statement.
Judging from some of these data points, the pace of warming seems to be picking up, even with El Niño taken into consideration; and picking up at a faster rate than many expected.
In the third month of 2016, the Paris COP and climate agreement may seem to be fading in the rear view mirror. The success of that accomplishment was not just about getting all parties of the UNFCCC aligned, but also all the constituents who came together to call for this agreement. They include civil society and – importantly – leaders in the business and financial sectors, including institutional investors, insurance companies, and financial institutions of all shapes and sizes. The efforts to pull each of these stakeholders into unified support for an international agreement cannot be overstated. The hard work that resulted in the Paris agreement was many years in the making and was the result of efforts from all parts of society.
But everyone who worked so hard to get that agreement across the finish line knew that getting words on the page was just the beginning of the real work. We need to transform energy systems, build resilience, and develop new ways of producing and consuming everything from food to energy to water. The Paris agreement needs to result in action. And it needs to result in action soon.
Time to Pick Up the Pace – Know Your Risk, Pursue Your Resilience
In Al Gore’s recent TED talk, he was full of optimism that we can address this problem. I would agree, with one significant caveat: The pace of our action MUST outpace warming.
Outpacing warming will be no small feat. It will require unprecedented effort from the public and private sectors alike – government and business, finance and consumers. We know we will have to build better faster, and we will have to implement (quickly) policies that help transition economies smoothly.
For the financial sector, “picking up the pace” may come down to two simple principles: Know your risk. Pursue your resilience. These are two sides of the same coin.
We have numerous opportunities to pursue our resilience, and we should not hesitate to pick up the pace of investments in those opportunities. There has never been a better time to invest in clean energy, energy efficiency, and new technologies that have the potential to catalyze transformation to a low-carbon world. The INDCs also provide significant investment opportunities in both developed and developing countries provided they can be turned into pipelines of investable projects. We cannot and should not wait to begin to bring those projects online. Climate resilience should also be integrated into new infrastructure investments around the world, and investors should seek out those opportunities. All types of financing should be brought to bear to make those investments a reality as soon as possible.
Knowing your risk can also help accelerate the pace of investments, particularly the right type of investments. For the financial sector, climate risks – namely those resulting from stranded carbon assets and those resulting from physical impacts from climate change – must be fully integrated into investment decision making. Many organizations, such as Ceres and Carbon Disclosure Project (CDP), have been making the case to the business and financial community for over a decade that reducing exposure to carbon assets is critical and that it would be prudent for investors to assess their stranded asset risks. These efforts to bring critical information and raise awareness around carbon risks have resulted in significant momentum, with many international financial institutions moving away from coal, and the recent historic pledge in Paris from 25 institutional investors to decarbonize more than $600 billion from their portfolios.
Recognizing how climate change – particularly physical risks – may expose a financial institution’s investments sounds easier than it might be in practice, yet risk management is core to any financial institution’s operations, so efforts to mainstream climate risk makes sense and should be accelerated. Doing so will require tools, analytics and data digestible for investment decision makers, and these must be developed. In parallel, the Financial Stability Board’s Task Force on Climate-related Financial Disclosures is looking at the development of voluntary disclosure mechanisms that can help inform investors and enable them to respond to climate change risks.
As each record-breaking-hot month passes, it is becoming clear that we don’t have another decade to make the case to investors that the physical impacts of climate change must be a critical component of investment decision making. As I wrote in an earlier blog post, the sooner we have a system that can help investors understand expected exposure to our rapidly warming world, the sooner we can proactively build in resilience to effects of rising temperatures. Indeed, on this front, time is of the essence, and these tools and this information will be critical to help us build better, faster. To quote Mr. Gore: We can, and we must.
“It’s Not Just ‘a’ Black Swan – It’s a Flock of Them That Worries Me”
So said a colleague last week during a meeting on sustainability, climate finance and risk. On the heels of several consecutive hot years and rises in CO2 concentrations not seen in millions of years, alarm bells should be sounding for everyone. As Nassim Taleb reminds us, black swan events are characterized as those things that couldn’t possibly happen (so we think), and which lie “outside the realm of regular expectations because nothing in the past can convincingly point to its possibility.” And, as we know, black swan events carry with them extreme impacts.
But our climate data – yes DATA (those pesky facts) – are pointing to exactly the possibility that before our very eyes those outliers (probabilistically speaking) are moving toward the center line. Climate change is moving our world beyond “normal”. Indeed, as Eric Holthaus wrote last week in Slate, the “old normal” is gone, and “climate change is going into overdrive.”
It’s time for our action to go into overdrive, as well.