Climate Risk Monthly — September 2024

Welcome back to Climate Risk Monthly. In this edition, we take a closer look at nature risk - what is it, and how is it different from climate risk? Thanks to everyone who voted on this topic in our last newsletter. In addition we have some exciting new GARP content to share, and our usual coverage of recent news events.

Looking to expand your knowledge and skills across climate risk, nature risk, corporate sustainability, transition planning, and more? Explore the benefits of GARP's Sustainability and Climate Risk (SCR?) Certificate today!

The Climate Risk Mini-Quiz

Want to test your knowledge of climate risk? We've devised a short quiz on topics from our SCR Program curriculum.

Click here to access the quiz.

This month’s mini-quiz focuses on the science of climate change. Good luck and let us know how you do in the comments below!

October Event: Climate & Nature Risk Practitioners' Month

Cutting Edge Tools and Guidance for Finance Professionals

October 10th, 17th, 24th, 31st | 4:00 BST/GMT

This four-week series of webcasts marks the release of a brand-new set of insights from the Climate Financial Risk Forum (CFRF), the world’s first forum bringing together practitioners and regulators to develop best practices for climate and nature-related risk management.?

GARP is excited to host the launch of the CFRF’s fourth year of outputs, the result of a collaborative effort between banks, insurers, and asset managers, as well as consultancies and academics that have been convened by the Bank of England and the Financial Conduct Authority.?

In these webcasts, our speakers will share pioneering tools and guidance, designed by, and for, finance professionals to help tackle the escalating risks from climate change and nature loss.??

Click here to register and find out more.

Recent GARP Content

Contributed Article | 29 Aug

Climate Risk Podcast | 5 Sept

Contributed Article | 11 Sept

Contributed Article | 18 Sept

Climate Risk Podcast | 26 Sept

Climate Risk Webcast | 26 Sept

Special Feature: What's the Difference Between Climate Risk and Nature Risk?

Awareness of climate risk has grown significantly in the past decade, driven by regular reports of record-breaking temperatures, increasingly extreme weather events, and other high-profile consequences of climate change.

The concept of nature risk may be less familiar, but it is no less important. A recent PwC report found that more than half of global GDP, roughly USD 58 trillion, is materially exposed to nature-related risks — up from USD 44 trillion in 2020. So, what is nature risk, and how is it different from climate risk?

Defining Climate Risk

Climate risk (or climate-related risk) refers to the potential negative consequences of the changing climate on organizations and society. It is divided into two main categories: physical and transition risk.

Physical climate risks arise from the geophysical effects of climate change. This includes both acute hazards, such as hurricanes and floods, and chronic hazards, such as sustained higher temperatures and rising sea levels.

Climate transition risks arise as society shifts to a lower-carbon or net-zero economy. There are multiple drivers of climate transition risk, including policy (e.g., carbon taxes or cap-and-trade programs), legal, technological, reputational and market risks.

Understanding Nature

Fundamentally, nature refers to the natural world, including land, ocean, freshwater, and the atmosphere. The term ‘natural capital’ is used to refer to the stock of all natural objects (e.g. metal ore, plants, animals), processes (e.g., pollination) and systems (e.g., ocean currents).

The flow of benefits to society from the stock of natural capital is called ‘ecosystem services.’ For example, the ability of soil to grow food is an ecosystem service.

All organizations are in some way dependent on the benefits provided by ecosystem services.?Similarly, all organizations can have impacts on nature, which can be either positive or negative.

Defining Nature Risk

Nature risk (or nature-related risk) refers to the potential negative consequences of nature loss on organizations and society. Like climate risk, nature risks can be divided into physical and transition risks.

Physical nature risks arise from the physical degradation of nature, for example through pollution or deforestation. As with climate risk, the hazards that lead to physical nature risks can be acute (e.g., an oil spill) or chronic (e.g., overfishing).

Nature transition risks arise from a misalignment between the actions of people, companies or governments and actions needed to protect, restore and/or reduce negative impacts on nature. Like climate transition risk, there are multiple drivers of nature transition risk, including policy (e.g., deforestation regulation), legal, technological, reputational and market risks.

Key Differences

There are obvious similarities between climate and nature risk. Both concern the impact of environmental problems on our society and economy; both occur globally and at multiple timescales; and both can be divided into physical and transition risks. However, they are also fundamentally distinct in several key ways.

1. Nature is far, far bigger than climate.

Nature is the whole enchilada – it is every physical thing and process that occurs on the planet, including the atmosphere, and therefore, the climate system. Climate change is a global issue, yes – but nature is the globe.

2. Nature risk includes climate change, but climate risk does not include nature loss.

Climate change is driven by anthropogenic greenhouse gas (GHG) emissions, i.e. global warming. Climate change, in turn, is one of the five drivers of nature loss, the other four being land/sea/freshwater use change, resource exploitation, pollution, and invasive species.

Loss of nature does affect climate change, as degraded ecosystems no longer sequester carbon effectively. However, climate risk frameworks do not explicitly include nature loss, whereas nature risk frameworks do include climate change because it is such a significant driver.

3. Climate change happens globally, nature loss happens locally.

Since the atmosphere is a globally connected resource, the addition or removal of one tonne of CO2 from any location in the world will impact climate change on a global scale. However, an increase or decrease in nature in one location may not impact other locations. Even when driven by global phenomena like climate change, nature loss is a local occurrence and requires local solutions.

4. Nature risk may require different solutions to climate risk.

Since climate change is a driver of nature loss, one might expect that any activity that generates a reduction in GHG emissions would reduce both climate change and nature loss. However, an activity that is good for the climate can be bad for nature. For example, biofuels produce less GHG emissions than fossil fuels but are significantly more land-use intensive. Reducing nature loss requires attention to all five drivers.

Parting Thoughts

While nature risk and climate risk are closely related and partly overlap, nature risk requires a much broader look at how society both impacts and depends upon the natural world. Although climate risk is currently more mainstream, nature risk is a greater priority for both firms and regulators as our knowledge of the risks increases and we increasingly experience the impacts of nature loss.

If you’d like to learn more about nature risk, consider checking out these resources from the GARP Risk Institute:

• Article - 3 Key Areas for Understanding Nature-Related Risks
• Podcast - TNFD and Beyond: An Introduction to Nature in Finance
• Webcast - An Introduction to Managing the Financial Risks from Nature Loss
• Webcast - Navigating Nature: Understanding the TNFD’s Recommendations
• Whitepaper - Global Survey of Nature Risk Management at Financial Firms

September 2024 News Digest

The Hidden Value of Vultures | The Washington Post

How do you feel about vultures??Does seeing their wrinkled, featherless faces fill you with feelings of warmth and gratitude? If not, you might find that changing after reading this article from The Washington Post. By one researcher’s measure, each vulture may provide us with thousands of dollars’ worth of service in its lifetime – it may even save human lives. How you might ask? Nature risk holds the key to understanding.

One key concept of nature risk is the interconnectedness of ecosystems. In an ecosystem, many different species – be they mammals, plants, microbes, or aesthetically-challenged birds – live together in a state of stability. Each species, through pursuing its own needs, meets the needs of one or more of the other species. Should something disrupt that system, however – by introducing an invasive species, damaging the natural resources, or, say, by accidentally killing off vultures – the consequences can be much more severe than we might expect. Vultures serve a vital purpose especially in cattle-raising areas, as they can quickly dispose of animal carcasses and eliminate dangerous bacteria and viruses. Without vultures, however, those carcasses provide a dangerous new vector for disease to spread.

Key Points:

• When the anti-inflammatory drug diclofenac started being used to treat cattle in India in the 1990s, there was no intent to impact vulture populations – but, because the drug was highly toxic to them, over 90 percent of vultures died off in less than 10 years.
• The decline in vulture populations led to increased spread of disease in surrounding areas, and an estimated 4% increase in human mortality.
• Based on the infrastructure and public health costs incurred to deal with the aftermath of the decline in vulture populations, researchers estimate each individual vulture was likely providing between UD 3,000 and USD 4,400 of economic services in its lifetime.

Click here to read the full article.?

China Plans to Include Steel, Cement and Aluminium in Its Carbon Market in 2024 | Reuters?

China’s Ministry of Ecology and Environment has announced its intentions to expand its national carbon emissions trading scheme to include the steel, cement, and aluminium sectors by the end of 2024.??

Approximately 1,500 companies, each emitting more than 26,000 tonnes of carbon annually, will be connected to China’s National Carbon Emission Trading Market (NCETM), increasing the proportion of annual emissions covered by the scheme to 60% of the country’s total – an amount greater than the total annual emissions of the U.S.?

This expansion of the NCETM supports the country’s aim to peak carbon emissions by 2030 and achieve carbon neutrality by 2060. The move is also seen as a direct response to the European Union’s impending carbon tariffs on imports like steel and cement, which will start in 2026.?

Key Points:?

• China will add steel, cement, and aluminium to its carbon trading market by 2024, covering 60% of national emissions.?
• 1,500 companies emitting over 26,000 tonnes of CO2 annually will be affected by the changes.?
• The expansion supports China’s climate goals and addresses EU carbon tariffs set to begin in 2026.?

Click here to read the full article.

Green Recovery Funds Misapplied, Unassessed According to EU Auditors | EuroNews

A new report by the European Court of Auditors (ECA) calls into question the legitimacy of how green funds are being used in several countries. The court alleges that Croatia and Portugal have both inflated the positive climate impacts of several infrastructure projects, and that hydropower projects in Greece and Slovakia either ignored potential negative environmental impacts or set budgets much too high relative to their climate targets.

This is the latest finding in a recent trend of investigations posing major questions about how climate finance is being utilized, and it comes at a time when climate finance is top-of-mind for many countries.?At the fast-approaching COP29 in Azerbaijan, nations will be asked to make new commitments as to how much money they will contribute toward fighting climate change. Underlying those commitments will be a key question: how can we ensure the money will be used for the right purpose?

Key Points:

• A recent report from the European Court of Auditors identifies multiple green projects in Croatia, Greece, Portugal, and Slovakia that exaggerated their climate benefits.
• The audited funds stem from the EU’s Recovery and Resilience Facility (RRF), which dispersed EUR 275BN across bloc countries to support the EU’s green transition goals.
• The report indicates governance and tracking shortcomings in the RRF’s fund dispersal policies and highlights the need to improve these practices for future green finance initiatives.

Click here to read the full article.

Photo of the Month

Each month, we will select a reader-submitted photo to highlight in our next newsletter. If you’d like to participate, please send your photo to [email protected], along with your name and where the photo was taken.

Thanks for reading - see you next month!