Finance sector ramping up its climate change strategy

The finance sector is ramping up its climate change strategy, according to a recent article by Rich Hampshire, a VP of consulting at CGI. And it’s not just because of encroaching regulation.

Hampshire notes that the global financial services sector is facing growing pressure to measure and disclose exposure to climate-related risk. The Bank of England in a 2019 Supervisory Statement laid out expectations for firms in managing financial risks from climate change – including physical risks from weather events and transitional risks from the changeover to a lower-carbon economy.

The EU Commission is putting forward a standard taxonomy to more accurately compare the sustainability of companies and cut down on misleading “greenwashing” efforts. The EU taxonomy, which comes into effect in 2022, will create a uniform classification system for sustainability activities and reporting in the finance sector.

The Bank of Canada, meanwhile, is working on a multi-year research plan focused on climate risks to the financial system. It’s also engaged in a pilot project with several large banks and insurance firms focused on developing climate scenarios that will help financial institutions better understand their climate risks.

However, there is another key element at play that will change corporate behaviour even more than regulatory mandates: more expensive insurance. According to Hampshire, the insurance sector will begin pricing in exposure to climate risk – which will directly affect the cost of doing business in the energy sector as well as all other sectors. This will push up climate risk exposure and related costs on executive priority lists.

The investor community will also begin pricing exposure to climate risk into the cost of capital. As such, clear and consistent disclosure will affect a company’s ability to secure investment and win business, Hampshire says.

“Those companies that have been hiding behind ‘greenwashing’—the practice of creating a misleading impression about one’s sustainability efforts—will face exposure,” Hampshire said. “Doing the right thing will no longer be a decision that involves moral and ethical trade-offs; it also will be the right thing to do economically.”

Companies across industries will increasingly factor climate response into their strategies and adjust their business models. In turn, they will have to examine climate risks across their entire supply chain and reduce exposure to physical, transitional, and reputational risks.

Recognizing the need to address climate change in their own footprint, many firms – and especially consulting firms – have committed to net-zero carbon emissions by 2030. This includes the MBB strategy consultancies and the Big Four accounting and consulting firms. Canadian firms Stantec and CGI have also committed to net-zero 2030 targets.