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I’m a fan of making things simple, easy to understand and practical. That is a challenge in ESG, sustainability and climate matters, especially when so many practitioners seem to revel in opacity, ambiguity, complexity and the insular lexicon of the space. However, last week renowned Harvard and Oxford professor Robert Eccles wielded a light saber like a Jedi master through the Empire of Climate Financial Risk Overcomplication. His article in Forbes (subscription may be required) is the clearest explanation I’ve seen of climate-related financial risk. Spoiler alert – he’s not talking climate impact or double materiality here.

I highly recommend reading the article in its entirety (more than once, actually), but here are a few hard-hitting excerpts:

“The problem is that this incantation [‘climate risk is financial risk’] is often used to conflate climate impact with financial risk, with the assumption that emissions equate to financial risk and that managing climate-related financial risk will deliver net-zero outcomes. While climate risk certainly can pose financial risk, climate risk is not always financial risk, and managing the financial risk from climate change is not the same thing as managing climate impact.

… hand-waving that equates financed emissions with financial risk to banks conveniently ignores the short time horizon of most corporate lending. A bank doesn’t have 10-year credit risk on a one-year loan – and no one thinks ‘big oil’ is going bankrupt in the immediate future…

But what do we really mean when we’re talking about climate-related financial risk? Going back to basics, when we talk about financial risk, what we’re talking about is risk of financial loss. Then the next question is risk of financial loss to whom? Over what time horizon? And how material is that risk of financial loss? These are important questions. Sometimes they are implicitly assumed, but often too vaguely stated and sometimes not at all.” 

This has very real and practical implications in climate disclosures. Bob’s points hit home, as Meredith and I just reviewed a draft of our upcoming Sample Disclosure for the final SEC climate disclosure rule. During our review, we had more than one discussion about climate-related financial risk and materiality in the rule. In a similar vein, I found this blunt quote in my daily email from Responsible Investor Friday:

“‘Transition financing is not easy. What makes sense for the climate may not make sense commercially – and if it doesn’t, private capital will not flow.’ Hard truths? Ravi Menon, chair of the GFANZ APAC advisory board, and former NGFS chair and Singapore central bank governor, weighs in on transition finance.”

It can be hard to stay objective about climate risk and impact, but it is necessary – especially if you expect to use finance as a lever for change.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile