What Financial Risk Management Has To Do With Climate Change – And The Price Of Inaction (Forbes)

FORBES | When we talk about the long-term risks of climate change, it’s hard for the American public, for company executives, and for lawmakers alike to accurately picture what the implications of climate inaction will mean ten, twenty, or fifty years from now. We hear stories of worst-case scenarios, but sometimes it sounds more like science-fiction than reality.

To better understand this issue, I turned to my friend Bob Litterman, a financial risk expert who managed risk for Goldman Sachs for two and a half decades. He explained that, “Financial risk management has several simple principles that apply to managing climate risk.” First, it involves identifying the “worst case” scenarios. Second, the objective of financial risk management isn’t to minimize risk, but rather to price and allocate risk appropriately. Third, is recognizing the value of time – it’s a scarce resource. Let’s examine these three principles more closely in relation to climate change.

Imagining “Worst Case” Scenarios

We know climate risks are large, but just how large is hard to anticipate. Traditional risk-modeling techniques rely on historical data to make future projections – but we are in uncharted territory. Human-caused climate change has a short history, surging in the mid-20th century through present day, and its impact is cumulative, building year to year. According to NASA atmospheric scientist David Crisp, “Half of the increase in atmospheric carbon dioxide concentrations in the last 300 years has occurred since 1980, and one quarter of it since 2000.” And unlike some other gases, carbon dioxide stays in the atmosphere for centuries, between 300 to 1,000 years. Regulators and financial market participants are handicapped in their ability to make informed decisions, as forward-looking analysis methodologies are still being developed.

Read more at Forbes: https://www.forbes.com/sites/billfrist/2023/07/10/what-financial-risk-management-has-to-do-with-climate-change–and-the-price-of-inaction/?sh=2670b7a33304