Chris Mooney published yet another article on climate change in the Washington Post last week, this time about the dramatically low level of sea ice in the Arctic Ocean. The same day, Angela Fritz had an article on how atmospheric carbon dioxide had reached a “huge record high.” As Mooney reported, Arctic sea ice covered just 4.63 million square miles at its maximum extent for the year in May, a new low in the satellite record, according to the National Snow and Ice Data Center. At the same time, the concentration of carbon dioxide in the atmosphere averaged 407.7 parts per million for the month, up 3.76 ppm from a year earlier, as measured at the Mauna Loa Observatory in Hawaii. The last time the planet experienced such sustained CO2 growth was between 17,000 and 11,000 years ago as Earth emerged from the last ice age, and today’s CO2 growth rate is about 200 times faster, NOAA reports.
If it’s not already obvious, historically low sea ice is not a good thing, and neither is the skyrocketing level of CO2. Not only are we seeing a tsunami of record warm months, but much of this spring’s science news suggests the potential for significant tipping points on the horizon. Greenland’s ice is melting faster than expected, and sea level rise may put many major cities at risk more quickly than previously thought.
Imagine what just 3 feet of sea-level rise would do to a city like Miami. More than $39 billion in property value in Miami is exposed within 3 feet of sea level. NOAA estimates that 1 meter of sea-level rise, a little over 3 feet, could result in 322 days of flooding per year there, impacting roads, buildings and other infrastructure. And with these rising seas, salt water will inundate fresh water sources. It’s hard to imagine how the economic engine of Miami – or any other major coastal city – could continue to function under such conditions, or bear such costs.
It’s time for our investments to address climate change to go into overdrive – before we get in over our heads.
Time to “Get the Finance Flowing” – For Real
In the two years leading up to the Paris Agreement, the mantra from many leaders in international policy and development was to “get the finance flowing.” Some people may wonder what financing has to do with this challenge. Quite simply: Everything.
A lot of really smart people understand that we need to do more to build resilience to climate change and bring down emissions, and do it faster, and yet it seems that what is being built and the money being invested is nary a drop in the ocean. Last year’s record investment in renewables was only a start.
There is vast potential to do more, with significant cost savings down the road for everyone.
Part of the solution will be to bring climate into the DNA of finance across the board – what some are calling “mainstreaming” climate action. Mainstreaming, by definition, would move climate-smart investments from incremental, the boutique and the niche, to a core part of how institutions think about financing. What are the risks that climate change poses, and (far more exciting) what are the opportunities to invest in our resilience?
That is an easy statement to write, but much harder to execute – particularly for banks and investors who lack enough information about the risks climate change may pose to existing or future investments. I often hear from clients that understanding these risks is one of their greatest challenges. Without clear information, the potential to build in tomorrow’s risk today is enormous.
Systematically integrating climate considerations throughout a financial institution’s operations, products and services is not just about making a “commitment” to address climate change, reduce a carbon footprint or increase investments in renewable energy; it is about lending strategies for long-term success. And it is about risk management. There is a growing body of emerging practices from development finance institutions on how to execute on mainstreaming, and increasingly, these institutions are tackling the problem of climate risk – a critical component to ensure climate is integrated into their DNA.
There is another thing that might help bring climate closer to the DNA of finance. It’s about pricing.
Get Prices Right, Get Pricing Right.
Economists will tell you that if you get the pricing signals right, finance will flow in the right direction. In the climate world, this concept underpins efforts to put a price on carbon. Carbon pricing is a policy tool that in theory helps transfer the cost of impacts from greenhouse gas emissions from society to the polluter. This cost – in the form of a carbon price – is itself a price signal, and if high enough will drive investors toward low-carbon investments. Getting a price on carbon requires political will and setting prices that are meaningful enough to function as a price signal with impact. Recent efforts – notably by the World Bank and others – have reinvigorated momentum for carbon pricing mechanisms among leaders of many countries, states and territories to enact carbon pricing mechanisms.
Carbon pricing is a simple, effective and efficient tool to transition toward clean energy and drive down emissions, but it does not provide a price signal that can help ensure investment choices are resilient to our warming world.
When it comes to climate risk, a great number of people in finance seem to have a difficult time figuring out where to start. The future risk seems unknown. The extent of warming depends on how much we emit, and population and economic growth will have an impact on consumption. Furthermore, the timing and intensity of future climate-related weather events, and the potential for wider repercussions, is hard to model. While some have called for a Climate Adaptation Unit, trying to determine ex ante what the future risk of climate change is to any individual investment turns out to be far more difficult than calculating particles emitted from the combustion of fossil fuels.
The good news is that there are numerous efforts underway to help solve this conundrum. For example, the Financial Stability Board’s Task Force on Climate Related Financial Disclosures has identified the need for clear, consistent, comparable and verifiable information on climate risk as a basis for any disclosure mechanism. Companies are emerging that can provide businesses with tools to understand their exposure to certain climate-related weather hazards, such as flooding, storm surge or drought.
With the planet sending warnings with its highs and lows, we need to start picking up the pace of our action. For real. Mainstreaming and pricing can help get financing flowing in the right direction, in larger amounts, faster. We also need leadership from above and movement from below to reinforce action and help focus attention on ensuring all our investments are resilient, for the short, medium and long term.