Assessing climate risk as a path to resilience
Climate change poses a risk to human survival. It’s also a financial risk. Investors need to treat it that way right now.
A Leadership Article by Nancy Saich, European Investment Bank
Climate change threatens humanity. Our cities, our agriculture, our lives—and our economies. In the financial industry, we must play our part in holding back the impact of climate change by minimising climate risk in the economy.
When we make a loan, we must assess whether it will be paid back, but also whether the money has been allocated efficiently. That means making sure that investments are in line with the goals of the Paris Agreement. It also means realising that the climate change risks on the projects and operations of our counterparties, in turn, represent climate change risks for the European Investment Bank, and that in turn we as a public bank have an import role to help our clients to mitigate those risks – and that includes not only transition risks but also physical impacts from a changing climate.
That’s why we launched a climate risk assessment system in February 2019. All new investment projects are now systematically screened at the appraisal stage for their climate change vulnerability. It’s a big job, because, after all, we signed €72 billion in new loans last year. Then, our teams engage with clients to support their climate risk and vulnerability assessments and where we need to, we help them to manage their climate risks.
The European Investment Bank is a public institution owned by the 27 EU member states. Last year, we pledged to greatly strengthen our climate ambition – to become the EU climate bank. The EIB Group will use its financing to support more than €1 trillion of investments in climate action and environmental sustainability over the next decade, by increasing the share of such investments in the European Investment Bank’s financing portfolio to more than 50% by 2025. In addition, we will align all our financing activities with the principles and goals of the Paris agreement by the end of 2020.
So managing climate change risks is a matter of aligning to public policy, as well as sound banking practise. Any prudent financial institution needs to understand and mitigate risk across its balance sheet, including those associated with a rapid structural transition towards a low-carbon and climate-neutral economy, as well as the physical climate risks from climate change impacts. These transition risks are based around the prospect that, as economies decarbonize, non-aligned assets will become stranded.
The transition is rife with potential financial risk for our operations, because it might affect a counterparty’s ability to repay a loan. It can also affect the economic benefit of our projects, and, as a public bank, that’s usually why we invest in the first place. It is our duty to help our clients identify these risks and to increase the resilience of their projects, for their sake, for the fight against climate change and for our own balance sheet.
To understand the climate change risk in our existing lending portfolio, we consider the portfolio as an aggregate of operations and counterparties. In both cases, identifying climate change risks presents an opportunity for us to engage with and support our counterparties to make their operations and business models more resilient and in line with the goals of the Paris Agreement.
The bottom line is that managing these climate, environmental and social risks helps us to efficiently allocate and prioritise resources to projects that make a difference in the transition to a low-carbon, climate-resilient and environmentally sustainable economy that also leaves no-one behind. We have to drive more finance towards green investments that really help address these risks. Climate risk assessment is part of our contribution to the fight for a sustainable future.
Chief Climate Change Expert