Identifying and Reconciling Risk Across Sectors: The implications of differing views of risk in climate policy, environmental conservation, and the finance sector

Thursday, 18 December 2014: 3:10 PM
Tracy Johns, Wildlife Works Carbon, Mill Valley, CA, United States, Iain Henderson, United Nations Environment Programme, Finance Initiative, Geneva, Switzerland and Gabriel Thoumi, Calvert Investments, Bethesda, MD, United States
The presence and valuation of risk are commonalities that link the diverse fields of climate change science and policy, environmental conservation, and the financial/investment sector. However, the definition and perception of risks vary widely across these critically linked fields. The “Stranded Asset” concept developed by organizations like the Carbon Tracker Initiative begins to elucidate the links between climate change risk and financial risk. Stranded assets are those that may lose some or all value from climate disruption, changes in demand-side dynamics and/or a more stringent regulatory environment. In order to shift financial flows toward climate change mitigation, emissions-heavy activities that present finance and investment opportunities must also be assessed for their GHG-asset risk attributes in terms of their contribution and vulnerability to climate disruption, as well as other environmental externalities. Until the concept of GHG-asset risk in investment is reconciled with the risks of climate change and environmental conservation, it will not be possible to shift business and financial practices, and unlock private sector resources to address the climate change and conservation challenge.

 UNEP-FI is researching the application of the concept of Value-atRisk (VaR) to explore links between the financial sector and deforestation/REDD+. The research will test the hypothesis that climate risk is a financial risk, and propose tools to identify and quantify risks associated with unsustainable land-use investments. The tools developed in this research will help investors, managers and governments assess their exposures to the material REDD-related risks in their portfolios. This will inform the development of ‘zero net deforestation’ investment indices to allow investors to lower the ‘deforestation’ exposure of ‘benchmark’ financial indices used by many of the largest money managers. A VaR analysis will be performed, combining the notion of externality with the traditional approach of external (exogenous) risk analysis. The VaR component introduces probabilities for different scenarios and may ultimately lead to a full distribution for the holistic losses. These distributions are non-parametric and non-linear since climate change is an “event-risk”.