Ive here. Efforts to estimate the financial risks of climate change are futile. For one, climate change is subject to positive feedback loops, meaning truly dire outcomes could come sooner than expected. But secondly, financial risk methods all use discounted cash flow. After a lot of modeling, anything older than 10 or 15 years is almost worthless in terms of NPV. This effect is made worse by the fact that, as the Bank of England’s Andrew Haldane and others have documented, investors employ excessive discount rates, which reduce long-term costs and benefits.

Requiring risk metrics resembles a very, very weak form of taxation: Investors should take notice and punish underperforming companies, and/or companies themselves should tax themselves by spending more on less climate-ravaged Methods.

Taxes are the wrong thing to do when the future of the planet is at stake. As Haldane explained in his paper, The $100 Billion Question:

The auto industry is a kind of pollution. Exhaust gas is a harmful by-product. Driving benefits those who produce and consume car travel services—the private interest of driving. But it also endangers innocent bystanders in the wider community – the social cost of exhaust pollution…

Banking is also a kind of pollution. Systemic risk is a harmful by-product. Banking benefits those who produce and consume financial services—the private interests of bank employees, depositors, borrowers, and investors. But it also risks jeopardizing innocent bystanders in the wider economy—the social cost of the banking crisis to the public.

Pause for a minute. This paper was written in 2010. As one would now prefer to say, the biggest risk from car exhaust is not pollution, like damage to the lungs, but greenhouse gas emissions, which will create climate change on such a scale that it threatens agriculture and reduces levels of marine life, Inundating major world cities, in other words, harming human life and possibly disrupting production, so that the lifestyle of the steppe living standard would not look too dire.

Back to the paper:

In making these choices, economists often draw on Martin Weitzman’s classic public goods framework of the early 1970s. 13 Under this framework, the optimal amount of pollution control is found by equating the marginal social benefit of pollution control with the marginal private cost. this control. With no uncertainty in either costs or benefits, policymakers will not ignore taxes and restrictions when achieving a cost/benefit balance.

In the real world, there is considerable uncertainty in both costs and benefits. Weitzman’s framework tells us how to choose pollution control tools in this situation. Quantity constraints are optimal if the marginal social benefits forgone by wrong choices are large relative to the private costs incurred. Why? Because fixing the quantity to achieve pollution control while letting the price vary, there is no significant private cost. Constraints predominate when the marginal social benefit curve is steeper than the marginal private cost curve.

Results flip when the marginal cost/benefit tradeoff is reversed. If the private costs of wrong choices are high, fixing these costs through taxes may lead to better welfare outcomes relative to the social welfare forgone. Taxes dominate when the marginal social benefit curve is flatter than the marginal private cost curve. Therefore, the choice of taxes and bans to control pollution is ultimately a matter of experience.

Translation in economics terms: If the choice is to be made between the profits of the oil industry and all its dependents and the danger to civilization, it is a no-brainer that governments should have broad bans, not angels in their heads . There is a debate about what an appropriate financial risk metric should be at the a-pin level.

But no one believes in a muscled government anymore…except literally muscle, like the police.

By Julie Vano, Ph.D., Research Director, Aspen Global Change Institute, and Lana Vali, Philanthropy Senior Associate for Energy Innovation.Originally Posted in Yale Climate Connection
Weather and climate disasters cost America over $600 billionOver the past five years, there has been an impact on individual, corporate and public sector coffers. Just to give one example, Climate-triggered record rainfall from Hurricane Maria Notable in 2017 Drug Manufacturing Disruption In Puerto Rico, which accounted for 25% of total U.S. drug exports and 72% of Puerto Rico’s 2016 exports, hurting investors and people Who needs critical medical supplies Like an infusion bag.

In response to increasingly extreme weather patterns, global policymakers and investors are keen to predict future climate change risks and better prepare. However, in order to reduce damage from climate impacts and make well-informed policy and financial decisions, they need to accurately assess these risks.

Investors, companies and policymakers especially need this type of climate risk information. But despite the abundance of publicly available climate data, the connective tissue needed to apply this data to financial risk analysis has not yet been fully developed, requiring better coordination between climate scientists and those trying to assess financial risk.researchers now increasingly considered How climate science can better inform business risk analysis.

Policymakers Need Transparency… Easier Said Than Done

Policymakers are now starting to take the risks to the economy from climate impacts more seriously.Last year, the Biden administration issued a Executive Order on Climate-Related Financial Risks, which guides federal agencies in analyzing and mitigating the risks of climate change to homeowners, consumers, businesses, workers, the financial system, and the federal government. The U.S. Securities and Exchange Commission (SEC) recently proposed a mandate that, if passed, would require all public companies to disclose climate-related impacts on their businesses for the first time and report their greenhouse gas emissions in a standardized way. The Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) is responsible for developing consistent climate-related financial risk disclosures for use by companies, banks and investors when providing information to stakeholders.

The working group has developed a set of recommendations for disclosing information on climate risks and opportunities, as of October 2021, 1,069 financial institutions(responsible for $194 trillion in assets) has pledged to support these proposals. Broad public and bipartisan support supports these corporate climate risk disclosure requirements: 87% of Americans Support companies reporting climate-related risks, including nearly three-quarters of Republicans.

But assessing the climate risks facing businesses is easier said than done. as the researchers pointed out. There are significant hurdles for individuals preparing climate-related financial disclosures.exist a recent survey, they report that finding relevant data and applying appropriate risk assessment methods are their two biggest challenges, both of which are at the heart of their work. Furthermore, although public climate data is widely available, these data do not match the geography or timelines used in most financial risk analyses.

Climate models cannot easily predict local specific climate risks

Existing climate models Helping climate scientists better understand how greenhouse gases increase surface temperatures, altering weather patterns across large swaths of the globe. Most model outputs are relevant to assessing the state of climate change on a global scale and in 50 to 100 years, so model outputs cannot easily answer the primary question investors have in mind: what is the potential impact on a particular project in the coming years or decades ?

Attempts to use current climate data to inform financial decisions vary widely and can be concerning. Condensing long-term, global-scale climate data into a model that outputs predictions of short-term financial risk in a given region without adequate interpretation, yields artificial information at best. Authors of this study, these misleading attempts may actually lead to maladaptation and heightened vulnerability to climate change, overconfidence in risk assessments, and misrepresentation or “greenwashing” of companies’ climate responses point out.

While direct use of climate change data is not a panacea for assessing business climate risk, an interdisciplinary team of experts in Australia has charted a path forward for how climate science can better help businesses and their investors, lenders and insurance underwriters informed economic decisions. A recent study Led by Tanya Fiedler from the University of Sydney Business School and Andy Pitman from the UNSW Centre for Climate Change Research in Sydney, they explain the problem at the heart of current risk assessments: Climate research often only flows in one direction, from researchers trying to make informed decisions. enterprise. This restriction does not allow businesses to communicate their needs or concerns to climate researchers, nor does it allow climate researchers to adjust models and outputs to meet business needs.

New designs for better risk assessments – and help develop the business case for action

As an alternative, Fielder and her colleagues suggest strengthening professional intermediary groups focused on operational forecasting and climate services to encourage greater participation by climate scientists and businesses, and increase transparency about the value and limitations of climate model information. They stress that current barriers will not be solved simply by open access data or repackaged information by climate service providers. instead, they asked for a redesign Information flow to develop, refine and communicate appropriate climate forecasts in consultation with key decision makers.

The weather forecasting industry shows that a more participatory approach is possible, As Field outlined and her colleagues. Weather forecasts use complex numerical models that are 1) continuously updated and improved, and 2) supported by major national and international investments in science and data systems. In addition, weather forecasters turn complex weather simulations into useful information for non-experts. Fielder and her colleagues say a similar level of investment is needed in climate risk modelling to understand and communicate climate risk to policymakers, not just climate experts, such as those in the financial sector.

With the help of these “climate translators” and specialized modeling, businesses can build greater resilience so they can continue to operate safely and profitably in a changing and warming world.Without better understanding and preparation for the new uncertainties of climate change, assets, supply chains, jobs and livelihoods will suffer more severe and frequent disruptions as climate feedback loop accelerate. The weather will become more extremebut with the right support, the financial system we depend on is better prepared.

Increased awareness and improved climate risk awareness has led to Some businesses pledge to reduce emissions in their own operations Help slow uncontrollable climate change. Climate leadership in the corporate sector is growing as more companies begin to accelerate efforts to address the climate threat to their businesses—leadership is urgently needed to reduce global greenhouse gas emissions.