The danger of avoiding climate risk

In an op-ed article, SFL Director Rens van Tilburg argues, together with ORTEC Finance’s Willemijn Verdegaal and Lisa Eichler that new climate conscious financial products that minimize physical risks can actually increase the overall systemic climate riks.

‘Under weighting’ (investing less) in assets located in or significantly exposed to physical risks in vulnerable areas will result in a higher cost of capital for companies and sovereigns located in these areas. This makes it more expensive for them to finance investments, both for building resilience to climate change as for mitigation. This could result in a downward spiral, increasing the risk perception of the market further and so forth. This way, these products may actually undermine financial risk management in the long run.

They may even increase systemic risks as combatting climate change is inhibited, thus potentially fueling conflicts in regions that are often highly-populated and already face a host of economic, political and social challenges.  It is naïve to expect that global investors would be able to insulate themselves from such developments.