Why finance managers need to think about climate change

The impact of global warming is often in the headlines, receiving extra worldwide coverage following the UN Climate Change Summit at the end of 2015.

 

Now, a new report suggests that unless investors begin to consider the impact of their business decisions on the wider environment, they could be significantly increasing their risk profile.

 

Here, we take a look at why this is the case and how recruiting experts in the field can help firms to mitigate this risk.

Why firms need to prove they aren’t contributing to global warming

Writing in the publication Nature earlier this month, environmental lawyer and chief executive officer of ClientEarth James Thornton, investment manager Howard Covington and co-director of the Oxford Martin Net Zero Carbon Investment Initiative Professor Cameron Hepburn discussed why it is now vital that finance leaders pay greater attention to climate change.

 

The experts have argued that the growing threat of climate change is set to significantly harm the global economy, so investors with the power to determine if their firm goes ahead with a business decision that could add to the problem need to take action to prevent this from happening.

 

In fact, the report’s authors are calling for a legal ruling on the subject, which could see shareholders able to sue investors if they find out that the latter’s decisions are contributing towards global warming.

 

Mr Thornton stated: “To produce a wholesale change in attitude, a court ruling on the obligations of fiduciary investors to control systemic climate risk will probably be needed. Because of the uncertainties in estimating future climate damage, this will not be an easy case to bring. But we anticipate that such a case will ultimately succeed.”

 

His company, ClientEarth, successfully sued the UK government last year over its impact on air pollution, and is concerned that further organisations and authorities could be actively contributing towards issues such as famine, droughts and heatwaves, which affect millions of people around the world.

 

Although a firm may unknowingly be exacerbating these problems by making cheap business investments or failing to keep track of every party involved in its supply chain, if this becomes common knowledge, the company’s risk profile can soar, adversely affecting a brand’s reputational, financial and even legal standing.

Corporate social responsibility and risk

The issues listed above, and preventing them, should fall under an organisation’s corporate social responsibility (CSR) policy. The vast majority of shareholders and consumers expect the businesses they deal with to have a CSR policy as a standard nowadays, meaning that failure to present this information when asked could significantly impact a firm’s risk profile.

 

Official forecasts from the UK’s Met Office published in September 2015 predicted that 2016 will be one of the hottest years on record, primarily due to an increase in greenhouse gas emissions from businesses, meaning the decisions that investment managers make could potentially impact the weather – and not in a positive way.

 

Speaking to BBC News, Professor Rowan Sutton of the University of Reading commented: “We are seeing the effects of energy steadily accumulating in the Earth’s oceans and atmosphere, caused by greenhouse gases.”

 

With this mind, what exactly do financial services managers need to be doing to minimise their risk profile when it comes to global warming?

The role of financial risk specialists

With the possibility that investors’ actions could face legal scrutiny if they are found to be contributing towards global warming, it is vital that all banks, other financial institutions and businesses in general have a thorough corporate social responsibility policy in place.

 

Due to the high risk levels surrounding investments and climate change, it is recommended that any such policies are devised by a risk expert, with huge benefits available to businesses that take action to recruit such an individual.

 

The visibility of CSR policies is set to be under closer surveillance than ever before in the coming months and years, so it’s essential that firms get this right from the off. They need to be able to demonstrate that CSR is at the heart of each of their business decisions to remain competitive in today’s increasingly visible financial landscape and to help them stand out from the crowd.

 

Our Market Reports combine our review of the prevailing conditions in the risk management recruitment market together with the results of our latest employer survey.