Climate change has financial ramifications, and stakeholders are placing more emphasis on risk management protocols to assess and account for climate threats. On the Cleaning Up media platform, moderator Michael Liebreich interviews finance expert Bob Litterman on financial risk management in the context of climate. Litterman, a former Goldman Sachs economist, argues that time is of the essence in addressing the costs of global carbon emissions. Executives interested in a robust assessment of risk management in an era of climate change will find this an informative analysis.
- Time is running out to create a zero-carbon future and to mitigate environmental impacts.
- Climate change effects include rising sea levels, drought, severe storms and extreme temperatures.
- To speed the transition to net zero, policy officials must create a market pricing mechanism for carbon.
Time is running out to create a zero-carbon future and to mitigate environmental impacts.
Sustainability professionals insist that the worldwide lack of action toward mitigating the global carbon footprint poses grave threats for humanity’s future. If government and business had taken steps even 20 years ago, the likely scenarios for coming decades would be far less severe and much easier to manage from a risk perspective. Unfortunately, because of delays and a limited sense of urgency, many climate experts believe that time is no longer an ally and that Earth may have passed the tipping point.
“When managing risk, time is a scarce resource.”
In this context, policy officials must consider two distinct time markers: “commitment time and impact time.” The former refers to the several decades ahead, in which stakeholders must massively decrease carbon emissions; the latter references global catastrophes that will play out hundreds of years in the future.
Climate change effects include rising sea levels, drought, severe storms and extreme temperatures.
Increasing global temperatures cause sea levels to rise, in large part due to significant ice-formation melting. The Greenland ice sheet, for example, is already melting, and that melting continues to accelerate. Even if policy makers set protocols to cap global temperature increases by 2060, the most likely scenario is that the entire sheet – “a mile thick, 500 miles across and 800 miles north-south” – will melt over the next 100 to 300 years. As it melts over multiple generations, sea levels will rise significantly, by two to 10 feet above 2023 levels.
“We’re not, for instance, setting insurance rates that would cause people to move from risky areas to hardened infrastructure in cities…that’s what we should be doing in order to prepare for the changes.”
Climate change manifests in a dramatic increase in 100-year events, such as hurricanes, droughts, floods, heat and cold waves, hail storms and other catastrophes. From a risk management perspective, government and business leaders are not properly pricing the severity or magnitude of these events. Insurance relative to flood and sea level risks exemplifies this dilemma, which will ultimately lead to a mass exodus from coastal areas. That future risk should translate into higher premiums for policyholders now.
To speed the transition to net zero, policy officials must create a market pricing mechanism for carbon.
Considering insurance pricing opens up a larger conversation about climate risk relative to the global financial system. Corporate and political leaders should consider advancing multiple initiatives, including setting carbon pricing, persuading companies to offer more information about climate risks, and generating scenario analyses and stress tests. Reducing the carbon footprint worldwide is the paramount responsibility, as temperature increases of just a couple of degrees could produce catastrophic destruction – on the order of 90% – of the world’s ocean life.
“What we have to do is we have to create incentives globally to reduce emissions, and we have to do it very quickly…We may have already crossed a tipping point where it’s basically just too late.”
Mitigating carbon emissions toward a net-zero economy brings considerable financial costs, as estimates for this Herculean task total $3.5 trillion annually by 2050. To render such a sizable investment in carbon reduction practical, governments and businesses must determine a price on carbon to incentivize emission mitigation. The time window for decarbonization and a net-zero future is extremely small; without action, future generations are in peril.
About the Speakers
Bob Litterman is a founding partner at Kepos Capital. Michael Liebreich hosts the Cleaning Up media platform, which focuses on clean energy, climate dynamics and sustainability issues.