climate

The European Central Bank and the EU’s top insurance body have warned that businesses and households are not sufficiently insured against climate-related disasters, raising the risk of financial instability and economic crises. A discussion paper issued this week argued that catastrophe bonds should play a bigger role in bridging the overall climate insurance gap, while national and European authorities need to encourage uptake of policies to prevent such crises from occurring. 

The impending climate crisis is claiming ever-more attention on the political level. Part of the solution to it will be to spend what’s estimated to be trillions per year on cutting and mitigating emissions. The ability of the financial industry to raise and allocate money has got the political classes’ attention. Former US presidential candidate John Kerry – now the United States’ first-ever special presidential envoy for climate  –  and Luxembourg financial minister Yuriko Backes on Wednesday discussed Luxembourg’s role.

Banks are vulnerable to damage from climate change, which could particularly affect their balance sheets and asset holdings. Banks in southern Europe are more vulnerable than average: they face increased physical risks for more than 60 per cent of their corporate loans. Transition risks mainly involve loans to carbon-intensive sectors, which are included in the portfolios of a limited number of banks.

Understanding risks related to the climate and environment, also known as CRE risks, and managing them will be a key challenge for banks over coming decades. Luxembourg’s banking association ABBL has sought to provide a framework for this in a new publication which also features some guidance related to strategy and governance, integration of CRE concerns within risk management frameworks and disclosure.

71 percent of ESG investment funds do not meet the global climate targets set out in the Paris Agreement. Moreover, many explicitly named “climate” funds still appear to invest in fossil fuels. Of the large providers, State Street, UBS and BlackRock in particular achieve poor scores, according to the researchers.