Our Guide to Principles for Responsible Investment (PRI)
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In this article, we'll discuss the Principles for Responsible Investment and how these six principles can benefit both ESG factors and your finances.
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Understanding Climate Risk
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Climate change is no longer a distant threat; it is a present reality with increasingly critical implications for individuals and nations alike, as well as natural ecosystems. The latest research on climate risk paints a stark picture of the challenges ahead, but understanding the complexity of what contributes to the problem can point towards opportunities for action. Effective climate risk management requires a multifaceted approach, including reducing emissions, embracing new technical innovation, financial sector engagement, and implementing adaptation strategies. As policymakers, scientists, private sector stakeholders, and concerned individuals work together, navigating climate risk becomes more manageable. Let’s break down what attributes to climate risk and how we can help.
👉 This article synthesizes key findings on climate risk to examine the current state of climate change and actions that can mitigate its impact.
As Climate Risk Escalates, There Are Hard Limits to Adaptation
Vulnerable communities and ecosystems are facing hard limits to adaptation. This refers to the fact that there are no current strategies that can fully mitigate the damages. Coastal areas, particularly in the tropics, are witnessing the destruction of vital coral reef systems due to rising sea temperatures, while low-lying regions are increasingly dealing with displacement due to sea-level rise. As global temperatures rise beyond 1.5 degrees Celsius, these impacts will worsen, leading to more frequent and severe water shortages, crop failures, and heatwaves.
Highly vulnerable populations, including those in developing countries and small island nations, are already experiencing significant losses and damages. These impacts are not just environmental but also socio-economic, affecting livelihoods, food security, and health. For example, regions dependent on glacial melt for water supply, like Nepal and the Himalayas, are seeing unprecedented challenges as glaciers retreat. The impacts are further compounded by economic and political obstacles that hinder effective adaptation measures.
The potential for future climatic events poses a significant threat. For example, the frequency and intensity of extreme weather events such as hurricanes, floods, wildfires, and Category 4 and 5 storms are expected to increase. Not only do these natural disasters pose threats to infrastructure, but they also hold the potential to have lasting economic consequences. Insurance costs are rising, and the financial burden on governments and individuals to repair and rebuild is substantial.
“ 👉 Adaptation to climate risk is already an ongoing issue, with vulnerable populations bearing the brunt. Intense weather and resulting infrastructure damages are significant challenges to overcome. ”
Can the Financial Sector Help?
Financial institutions are increasingly recognizing their critical role in addressing climate risk. The United Nations Environment Programme Finance Initiative emphasizes the need for targeted systemic changes in the financial sector to support the net-zero transition. This includes aligning investment portfolios with sustainability goals and enhancing risk management frameworks to account for climate-related financial risks. As economists study the impacts of climate risks on world economies, there is a growing recognition that financial stability is linked to climate stability. Integrating climate risk into financial decision-making is not just a matter of corporate responsibility, but also good business.
Investors are increasingly demanding transparency regarding the climate risks in their portfolios. This demand is driving companies to disclose their climate-related risks and opportunities more comprehensively. Enhanced reporting frameworks, like the Task Force on Climate-related Financial Disclosures, are working to standardize this process. The easier it is for investors to compare and assess the climate resilience of different investments, the more success we will have in aligning financial gains with what’s best for the planet.
“ 👉 As savvy investors align their choices with sustainability goals, financial institutions are enhancing their portfolios with the environment in mind. This transparency is crucial for directing capital towards sustainable projects and ensuring that financial markets contribute to the broader climate goals. ”
Integrating Climate and Economic Models
Enhanced climate risk management requires improved integration of climate and economic models. The World Economic Forum advocates for more powerful tools to analyze Earth system changes, combining climate and ecological tipping points with broader planetary boundaries. This integrated approach can help policymakers better understand the long-term, non-linear, and cascading impacts of climate change. Investments in research and development, particularly in remote sensing and ecological forecasting, are essential to support these efforts. Combining climate and economic models allows for a more comprehensive understanding of how climate impacts can impact the world economy. This approach can help identify potential tipping points and cascading effects, enabling more effective risk management and decision-making. Integrated models can provide valuable insights into the costs and benefits of different climate actions, helping to prioritize investments and policy measures. By quantifying the economic benefits of climate risks we’ve successfully avoided, these models can build a stronger incentive for proactive climate action. By providing increased transparency that the health of our planet is tied to the health of our economies, these models can inspire unlikely alliances towards proactive action.
“ 👉 Integrating climate and economic models can provide valuable insights into the costs and benefits of different climate actions, helping to prioritize investments and policy measures. ”
Challenges and Opportunities of Geoengineering
The World Economic Forum's Global Risks Report 2024 explores the potential of geoengineering technologies, such as carbon capture and solar radiation management, to mitigate climate risk. Geoengineering projects are large-scale interventions poised to deliberately manipulate the Earth's climate system in an attempt to counteract the effects of climate change. However, these technologies come with significant risks and uncertainties. While geoengineering could help reduce global temperatures and capture carbon dioxide, it also poses risks such as unintended changes to regional weather patterns and potential legal and geopolitical conflicts.
The World Economic Forum's Global Risks Report 2024 underscores the need for careful regulation and global cooperation to manage these technologies' deployment. There is a risk that the prospect of a technological fix could reduce the urgency to reduce greenhouse gas emissions through more conventional means. Creating complacency could possibly undermine efforts to transition to a low-carbon economy, delaying policy changes.
“ 👉 Geoengineering has the potential to counteract climate risks, but it must be part of a broader strategy that prioritizes emissions reductions and sustainable development. ”
Emissions Reductions and Technological Advancements
The Fifth National Climate Assessment highlights significant progress in reducing greenhouse gas emissions in the United States. Between 2005 and 2019, U.S. emissions fell by 12%, primarily due to a shift from coal to natural gas and renewable energy sources in electricity generation. The growth of wind, solar, and battery storage technologies has been pivotal, supported by significant cost reductions. Despite these advances, the transportation sector has now become the largest emitter, necessitating further efforts to decarbonize this and other sectors.
Advancements in renewable energy are crucial for achieving deeper emissions reductions. Over the past decade, the costs of wind and solar energy have dropped by 70% and 90%, respectively, making them more competitive with fossil fuels. New innovation in battery storage is also key for developing renewable energy sources, ensuring a reliable and resilient energy supply. As these technologies continue to advance and scale up, they offer promising pathways for significantly reducing carbon emissions and transitioning to a low-carbon economy.
Energy efficiency is also critical, as improving the efficiency of buildings, industrial processes, and transportation can significantly reduce energy demand and associated emissions. Integrating BIM and other aspects of the digital revolution can help support sustainable construction practices. Similarly, smart grids, energy-efficient appliances, and electric vehicles are shifting how we produce and consume energy.
“ 👉 Investing in new technology to enhance renewable energy sources is key to competing with fossil fuels. These technologies not only reduce emissions, but also enhance energy security and create economic opportunities through new industries and jobs. ”
The Need for Immediate and Sustained Action
The Intergovernmental Panel on Climate Change recent findings stress the importance of immediate and deep reductions in greenhouse gas emissions to limit global warming to 1.5 degrees Celsius. Achieving this goal requires emissions to peak before 2025 and decline rapidly thereafter to ideally hit net zero by 2050. This transition calls for robust policy measures, technological innovation, and international cooperation. COP27 established funding initiatives, marking a critical step towards supporting vulnerable communities. To meet these ambitious targets, countries must implement comprehensive climate policies that address emissions across all sectors, including energy, transportation, industry, and agriculture. This includes setting clear emissions reduction targets, investing in clean energy infrastructure, and supporting research and development of new technologies.
“ 👉 International cooperation is vital for sharing knowledge, resources, and technologies to accelerate global progress towards mitigating climate risk. ”
How can Greenly Help?
Greenly helps companies assess their carbon footprint and identify small operational shifts that can have an impact on mitigating climate risk. Small actions, applied collectively, can make a true difference. Combining human analysis and innovative technology, Greenly creates personalized carbon accounting that is accessible to a wide range of companies no matter their size. Request a free demo with a member of our expert team to learn more about how to get started on your journey to lower your emissions and contribute to collective actions against Climate Change.
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