Insurers, Banks and Pensions Face Climate Change Risk: Institute

  • Potential ‘devastating risk’ posed to investment portfolios
  • Banks should go green and pare ties to high carbon industries

The world’s insurers, banks and pension funds are "inherently susceptible" to threats from climate change and must make adjustments, from shifting investment toward environmentally friendly industries to revamping strategies to reduce risk, said the Global Risk Institute.

“Climate change is a top priority that must be addressed systemically and without delay," concludes a report by the Toronto-based group that researches risks to the global financial services industry.

Climate change poses “a real and potentially devastating risk” to investment portfolios, including $35.4 trillion overseen by the world’s pensions. Global investment portfolios may lose up to 45 percent due to short-term shifts in climate sentiment, the institute said, citing a 2015 University of Cambridge study. Half those losses could be avoided by reallocating portfolios, though half would be unhedgeable without system-wide action on climate change.

“To avoid financial liability and mitigate climate change-related risks, pension funds must diversify their portfolios across all sources of risk and increase allocations to low carbon technologies and green energy,” the institute said.

Insurers, whose insurance losses from weather events swelled from an annual average of about $10 billion to around $50 billion in the past decade, face threats from physical events, risks tied to liability and “transition risk" from adjusting to a lower-carbon economy, the report said.

Climate change poses a direct risk to bank operations and lending, with real estate, infrastructure and agricultural businesses particularly threatened, the report said. Banks should scale back exposure to “high carbon industries” and assets that may suffer in tackling climate change and pursue “new green opportunities” in commercial and investment banking, according to the report.

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