{"id":20684,"date":"2020-05-21T08:22:48","date_gmt":"2020-05-21T15:22:48","guid":{"rendered":"https:\/\/www.climateworks.org\/?post_type=blog-posts&p=20684"},"modified":"2020-06-17T13:16:26","modified_gmt":"2020-06-17T20:16:26","slug":"a-pandemic-was-near-inevitable-so-too-is-climate-driven-disruption","status":"publish","type":"blog-posts","link":"https:\/\/www.climateworks.org\/blog\/a-pandemic-was-near-inevitable-so-too-is-climate-driven-disruption\/","title":{"rendered":"A pandemic was near inevitable – so too is climate-driven disruption"},"content":{"rendered":"

We knew that while a pandemic was unlikely to materialize at any specific point in time, it was highly likely \u2014 in fact certain \u2014 to emerge at some point<\/em>.<\/p>\n

According to the World Economic Forum, the threat of infectious diseases has been a top 10 global risk for years. That\u00a0moment\u00a0has arrived, revealing just how unprepared we were for the inevitable.<\/p>\n

Behavioural economists have come up with fancy words\u00a0to explain why:\u00a0cognitive dissonance,\u00a0hyperbolic discount functions,\u00a0normalcy bias.<\/em> These terms all try to capture the sad reality that we knew a crisis would come, yet did little to prepare. Ultimately the Covid-19 crisis shows us that Investors, companies, and governments need to do more to anticipate tail and mega risks and create actionable strategies to prepare for them.<\/p>\n

While attention now is rightfully on the now-crystalized risks of Covid-19, climate-related risks continue to mount, and there is much to learn from current events on how to manage them.<\/p>\n

As to the actual nature of Covid-19 compared to climate risk, there are obviously some differences to acknowledge upfront. Unlike a pandemic, the physical risks of climate change, inevitable in all but degree, will be more of a mix of gradual and sudden impacts. Gradual physical impacts will look like shifting crop production, water scarcity, and potentially climate-driven migration. The sudden impacts like droughts, crop failure, storms, and heatwaves \u2014 especially in combination \u2014 could generate shocks similar to Covid-19, but most likely on the localised level of individual economies or regions, rather than on a global scale.<\/p>\n

But there are also some crucial similarities. Covid-19\u2019s economic and financial impacts come from both the severity of the disease and the forceful societal response that it requires. Climate change\u2019s \u201ctransition risks\u201d of regulatory and techno-economic change are often modelled as gradual changes precisely because it is the least financially and economically disruptive path. But there is good reason to believe that the shape of the policy response to climate change will have more in common with a pandemic \u201clockdown\u201d than is immediately apparent. The speed and severity of policy change may be different, but have no doubt that policymakers will act forcefully in a crisis.<\/p>\n

The Principles for Responsible Investing (the PRI) commissioned the\u00a0Inevitable Policy Response<\/a>, a policy forecast to help\u00a0investors\u00a0anticipate and navigate\u00a0transition risk, which projects\u00a0that we are\u00a0increasingly\u00a0likely to face a bumpy\u00a0techno-economic and policy\u00a0ride\u00a0toward zero\u00a0greenhouse gas\u00a0emissions.<\/p>\n

As with Covid-19, failure to prepare society for mounting risks simply compounds the severity of the policy change necessary to contain the harm as it manifests. A good pandemic forecast may have foreseen both the health crisis and the fragmented, forceful, and disorderly policy response that has ensued because of inadequate preparation. Anticipating this dynamic is crucial to being able to take preparatory action and avoid reactive policy and worse outcomes.<\/p>\n

The\u00a0challenge\u00a0to preparing for these types of risks\u00a0are threefold.<\/p>\n

The first challenge is believability. It\u00a0didn\u2019t seem realistic or reasonable to assume that\u00a0one-third<\/a>\u00a0of the global population would be on lockdown due to a pandemic, with industrialized countries\u2019 hospitals testing their limits<\/a>, U.S. crude oil prices going negative<\/a>, and skyrocketing unemployment<\/a>.\u00a0Alas, this pandemic and the policy response to it has put much of the believability issue to rest in terms of expecting the \u201cunexpected.\u201d Many of the impacts we see now are from the stringent (and, in our view, entirely prudent) policy response to the pandemic and not from the disease itself. So too with climate change. The hope is that today\u2019s once unthinkable crisis expands our horizon on not only the possibility, but the high probability, of large-scale, climate-driven disruption to society, the economy, and the market.<\/p>\n

The second challenge is complexity. Climate change, like pandemics, is a complicated challenge, with complex impacts and feedback loops across the economy and investment portfolios. When people are faced with too much complexity, they often revert back to the familiar. For the pandemic, this may have meant imagining some of Covid-19\u2019s public health impacts, but not foreseeing the broader disruptions to commerce, trade, and human capital that would ensue from reactive emergency management. For climate change, analysts revert to base case expectations of continued emissions growth.<\/p>\n

The key counterweight to complexity is inevitability. A future with no pandemics, and no pandemic management policy, isn\u2019t actually a believable\u00a0<\/em>future anymore, even if understanding the alternative futures is complex. So too with the impacts of climate change, and the societal and political response to it. Scenario analysis is a useful antidote to complexity, helping us to navigate the inevitable. The Bank of England<\/a> has been leading a process to map out a range of climate economic scenarios<\/a> on behalf of a network of over 50 central banks<\/a> and supervisors. These authorities can then stress test banks, insurers, and pensions, including against an abrupt climate \u201cMinsky moment\u201d<\/a> of sudden market repricing from climate policy, to ensure that the markets take them into account.<\/p>\n

Still, while\u00a0a range of\u00a0scenarios are useful, the markets still need a base case.\u00a0What do we actually think is going to happen?\u00a0To address this, the\u00a0PRI has commissioned the Forecast Policy Scenario<\/a>,\u00a0a\u00a0scenario rooted in a high-conviction forecast of\u00a0the likely delayed, forceful, and disruptive\u00a0policy change\u00a0that will ensue as technological, cultural, and climate change spring load the politics of climate policy. This analysis is a\u00a0critical start to giving the market some needed foresight.<\/p>\n

Finally, even if you accept the\u00a0Inevitable Policy Response, and navigate the complexity, what can you actually do?<\/p>\n

As this storm passes, we must prepare for the inevitable transition to a zero-carbon economy. The good news is that there is evidence that investors have begun to batten down the hatches. The Inevitable Policy Response has created a \u201dforecast policy scenario\u201d and a framework to think about and plan for inevitable transition risks. So, on climate, the roadmap is clearer than one might think. PRI now requires members to undertake and disclose climate-related financial analysis<\/a> in line with the recommendations of the Financial Stability Board\u2019s Taskforce on Climate Related Financial Disclosure. Investors should demand, through coalitions like Climate Action 100+,<\/a> that the companies they own are resilient to climate risk. Investors can also get ahead of transition risk in their portfolios through pace-setting groups like the United Nations Net Zero Asset Owner\u2019s Alliance<\/a>. Ultimately investors can work with the PRI, and broader coalitions like the Investor Agenda<\/a> for climate change, to be the voice that not only calls out the need to prepare for pandemics and the present and future climate, but also does something about it. Society and the market both benefit from rapid and assertive action that anticipates the harm.<\/p>\n

An immediate opportunity comes into view. Governments are now on the cusp of initiating rare or even unprecedented fiscal stimulus.\u00a0 We have the opportunity to green that stimulus\u00a0or shovel money into carbon-intensive sectors and\u00a0load the economic with\u00a0further\u00a0risk. It is a crucial opportunity to minimize the severity of a future carbon lockdown.<\/p>\n

This pandemic is a lesson for what happens when we don\u2019t prepare.\u00a0Let\u2019s\u00a0make sure climate change isn\u2019t.<\/p>\n

This piece was first published in BusinessGreen.\u00a0<\/strong><\/p>\n","protected":false},"featured_media":0,"parent":0,"template":"","portfolio":[67,60],"yoast_head":"\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\t\n