The Financial Sector and Climate Change: Risks, Opportunities and Overall Preparedness

Abstract

Climate change is increasingly being recognised as a factor that will be one of the most significant challenges to face business, government and the community in the foreseeable future (IPCC, 2007; NOAA, 2008; and Hansen et al., 2007). The impact it will have on the financial services sector, is not immediately clear, as it is a comparatively low emissions sector and one that has received little public scrutiny in recent years in regards to climate change. Despite this, it is accepted that the financial sector will be critical to climate change response due to its role as a provider of capital and advice, and the influence this provides on both business and consumers. In addition, it is also argued that the impact of climate change (extreme weather patterns, sea level rises and atmospheric changes) on asset values, business performance and risk will also effect the performance of credit, investment and insurance portfolios. Finally, it is also apparent that the sector will be impacted by regulatory change in relation to their own operations and those of their clients as emissions reporting, carbon trading and other environmental policies become law.This study examines the preparedness of the financial services sector for climate change. Senior staff in sustainability related roles from across the industry are interviewed to this end. We find that the sector faces significant risk and potential reward from climate change, yet despite some examples of strong engagement, there are great disparities across institutions and the various subsectors of the industry. Interviewees argue that the sector does a lot of talking about climate change and awareness is high, but this has not translated into systemic action at the coal face. Accordingly, legitimacy concerns are yet to translate into a systematic and broad response from the sector. Therefore, regulatory intervention is seen as critical to improve the pace of response in the short term.