Fifty shades of green

The human costs are immeasurable.

The financial losses, however, can be measured, and they are significant. Insured losses in 2018 were $80 billion, double the inflation-adjusted average for the past 30 years.

But protection gaps in low- and middle-income countries mean that even greater costs are being borne by the uninsured. In 2017, a record $140 billion in insured losses was eclipsed by an additional uninsured $200 billion. In some of the countries most exposed to climate change—Bangladesh, Egypt, India, Indonesia, Nigeria, the Philippines, and Vietnam—insurance penetration is less than 1 percent.

The potential economic benefits of closing the insurance gap are striking. Lloyd’s of London estimates that a 1 percent rise in insurance penetration can translate into a 13 percent reduction in uninsured losses and a 20 percent lower disaster recovery burden on taxpayers. Substantial macroeconomic benefits include increased investment, higher output (potentially up to 2 percent of GDP), and greater climate resilience.

A 2018 Intergovernmental Panel on Climate Change report stresses that we have only 12 years left to stop runaway climate change. That is two average business cycles, 12 IMF annual meetings, 48 meetings of the Bank of England’s Financial Policy Committee. But currently the world is moving in the wrong direction: global energy emissions increased 1.7 percent last year. To limit warming to 1.5˚C requires a 45 percent decrease by 2030 and net-zero emissions by 2050.

The changes needed to keep warming below 1.5˚C are enormous: massive reallocation of capital is needed, which presents unprecedented risks and opportunities. The International Energy Agency estimates that a low-carbon transition could require $3.5 trillion in energy sector investment every year for decades—twice the current rate. Under the agency’s scenario, in order for carbon to stabilize by 2050, nearly 95 percent of the electricity supply must be low carbon and 70 percent of new cars electric, and the carbon dioxide intensity of the building sector must fall 80 percent.

For markets to anticipate and smooth the transition to a net-zero world, they need the right information; proper risk management; and coherent, credible public policy frameworks.

Here’s how.

A new finance
A new, sustainable financial system is under construction. It is funding the initiatives and innovations of the private sector and amplifying the effectiveness of governments’ climate policies—it could even accelerate the transition to a low-carbon economy.

Unfortunately, like virtually everything about the response to climate change, this new sustainable financial system is not developing fast enough for the world to reach net zero.

This is the Tragedy of the Horizon. The catastrophic effects of climate change will be felt well beyond the traditional horizons of most actors—imposing a cost on future generations that the current generation has little direct incentive to fix.

To bring climate risks and resilience into the heart of financial decision making, climate disclosure must be comprehensive, climate risk management must be transformed, and sustainable investing must go mainstream.

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