Climate change and environmental degradation are sources of structural change that affect economic activity and, in turn, the financial system. With the aim of offering an overview on the degree of knowledge that Spanish organizations have about climate-related and nature-related financial risks, members of Technical Committee 6 of Conama 2020 have launched a consultation that will be opened to fulfil until March 15th, 2021 that addresses these crucial issues to move towards a green recovery.
Climate-related and environmental risks are commonly understood to comprise two main risk drivers:
Physical risk refers to the financial impact of a changing climate, including more frequent extreme weather events and gradual changes in climate, as well as of environmental degradation, such as air, water and land pollution, biodiversity loss, deforestation and water stress.
Transition risk refers to an oganisation’s financial loss that can result, directly or indirectly, from the process of adjustment towards a lower-carbon and more environmentally sustainable economy. This could be triggered by a relatively abrupt adoption of climate and environmental policies, technological progress or changes in market sentiment and preferences, among other causes.
Physical and transition risk drivers impact economic activities, which in turn impact the financial system. Therefore, these risks also affect the resilience of businesses’ models over the medium to longer term, and predominantly those entities with business models that are reliant on sectors and markets which are particularly vulnerable to climate-related and environmental risks.
In addition, physical and transition risks can trigger further losses, stemming directly or indirectly from legal claims (commonly referred to as “liability risk”) and reputational loss as a result of the public, the institution’s counterparties and/or investors associating the institution with adverse environmental impacts (“reputational risk”).
Redirecting business models and capital flows towards activities that are nature-positive rather than activities that damage the natural environment is essential to achieve an orderly transition towards a more sustainable economy and a resilient financial system in the context of a changing climate and increasing biodiversity and ecosystem degradation.
To achieve this it is crucial that economic actors accurately acknowledge the climate and environmental risks to which they are exposed. Underestimating these risks leads to an inadequate allocation of financial resources to polluting or high carbon sectors, which not only exacerbates the effects of climate change and biodiversity and ecosystem loss and decline but threatens the very continuity of business and financial sectors and financial stability.
What degree of knowledge do Spanishcompanies and financialinstitutions have about these risks? What obstacles do they encounter when it comes to identifying, measuring, managing and communicating them? What solutions exist to these problems? What obstacles do they find in acting as drivers of actions that favor adaptation to climate change and reinforce social resilience? What opportunities are associated with an adequate management of climate-relatent and nature-related financial risks?
Until March 15th, 2021 you can have your say by participating in the consultation that we have launched in the framework of the Technical Committee 6 of Conama 2020 on “The future of climate-related and nature-related financial risks and their financial impact.” Responses collected will be used to draft a document that will be presented during the 15th edition of the National Environment Congress in April 2021. This document will include an overview on the situation of Spanish organizations in relation to these matters and a compendium of initiatives, methodologies, tools, problems and solutions, and opportunities associated with the adequate management of climate-related and nature-related financial risks.