One of the key themes identified in our Regulatory Outlook for 2019 was climate change and sustainability. This was because we saw 2019 as a year where the industry, central banks and regulators would increasingly focus on the financial risks that arise from climate change.
While we are only a short way into 2019 so far, we have already seen a number of regulators start to set out regulatory and supervisory proposals to help the financial services industry combat climate change. Alongside these initiatives we have also seen the industry take its own steps to try and calculate and analyse climate change related risks.
Quantifying the risks of climate change, especially the physical risks related to extreme weather events, has always been tricky. So it is significant that a new study shows that investors routinely underestimate the risks that extreme weather can have on their investments – risks that are only likely to grow in future.
The study looked at three US asset classes – municipal bonds, US commercial real estate, and US utility stocks – and found that the increasing prevalence of hurricanes, wildfires and floods was already affecting these investments, but was not fully priced in to current valuations.
Ultimately, the study shows that both investors and asset managers are not only starting to take climate change seriously, but they are also increasingly able to put dollar figures to the risks that climate change poses; something the financial world will take notice of.