Risk Dumping: What happens when you throw your 'climate risk'?over your neighbour's fence?

A few weeks ago, Stuart Kirk gave one of his first recorded talks since the now infamous speech declaring that investors didn’t need to worry about #climaterisk. In his original he rhetorically asked: “who cares if Miami is six metres under water?” adding that “Amsterdam has been six metres under water for years and it’s a really nice place. We will cope with it.” In his new talk, there is a more conciliatory tone and he apologises for his Miami ‘joke’.  To give Kirk credit, he then does a very good job of explaining the difference between primary and secondary investing (financing, and trading) and their respective impacts on the #realeconomy. 

What he doesn’t mention is that since his original speech, Amsterdam has shown signs of not being able to cope so well. The heat stress and droughts of the past summers have reduced the water table to the extent that it has exposed the ancient wooden beams upon which most of the city rests, causing them to rot. The cost of reinforcing foundations in homes and buildings could eventually run into the billions, and that’s only if there is capacity to perform the remediation work. 

Nor does he mention how climate risk is currenty being managed in Miami where adaptation measures have resulted in “homeowners in the wealthy part of town along the waterfront constructing private sea walls to keep water off their property”, diverting it to “drain into their neighbour’s yard” with the consequential overspill of septic tanks from sewage systems. It’s a case of managing climate risk by dumping it on your neighbours!

Stuart Kirk suggests that #divesting high-carbon stocks in purely ‘trading’ contexts (e.g. investment funds in secondary markets) are also guilty of dumping their risks (and stewardship responsibilities) on to others. Those who support divestment strategies would argue that it’s a little more complex than that – for as long as investors are invested, their lobbying priorities may be misaligned with the most timely transition policies. But the distinction between investor divestment and withdrawing primary financing is a helpful one. 

But the part of his original speech that Kirk does not return to (at least not for now) is the claim that #banks need not worry about the long term: he cited the case that his previous bank’s average loan term was 6 years, so why care what happens in year 7 or beyond?  This, in fact is the most egregious form of ‘risk dumping’ – a system where each individual bank would need not care about its contribution to #global climate risk if it could free itself of the majority of the impacts. It’s arguably the most important type of ‘risk dumping’ for #financial regulators to be concerned about (mostly shifting risk from the large #fossilfuel financers to those banking the real economy in more vulnerable communities or nations). To counter this would require regulation which pushed back against financial institutions with outsized contributions to systemic risk – one form of ‘macro-prudential' regulation.

While many in the regulatory system recognise this and some in leading roles, like Frank Elderson at the ECB, describe the need to align financial portfolios with climate goals, others have expressed that the job of central banks and regulators is to manage the stability of the financial system, not to proactively support climate transition. What the latest IPCC report reveals is that with the time for gradual climate transitions having slipped away, the responsibility of managing the stability of the financial system might now be fully contingent on proactively supporting a rapid #climatetransition and preventing the proliferation of risk dumping. That would mean a shift in perspective from central banks who are still more familiar with narrower time horizons and scopes.

Last month, Climate Safe Lending Network joined a number of organisations in discussions with academia and central bankers at the Bank of England to discuss some of the key macroprudential components that could be added to regulatory frameworks to deal with broader systemic risks. Given the potential for ‘regulatory risk dumping’ across jurisdictions, it is highly likely that progress will be best made multilaterally and within global institutions. This is why we intend to engage further with the Bank for International Settlements – BIS, Network for Greening the Financial System (NGFS),Taskforce for Climate-related Financial Risks (TCFR), and the Coalition of Finance Ministers for Climate. 

Until such time as the international regulatory framework is enhanced, we may have to find other ways to encourage a ‘zero waste’ policy for climate risk.