Financial peril tied to natural hazards
In 2022, floods in Pakistan devastated the agriculture sector, employing 40% of the workforce, driving up food prices and pushing the country to the brink of default. This event highlights the financial consequences of ecological instability, a reality that long-term asset owners like pension funds and sovereign wealth managers are now addressing.
These investors are integrating nature-related financial risks into their investment strategies. They embed environmental risks into risk management, investment analysis, engagement, and portfolio allocation to protect long-term value against planetary warming and environmental degradation.
Extensive risk assessment and portfolio scrutiny are key approaches. For example, Norway's Government Pension Fund Global assesses up to 96% of its portfolio for natural capital risks, recognizing the material impact of environmental shocks on long-term asset value. Finland's State Pension Fund is exploring ways to quantify nature-related risks in relation to long-term liabilities.
Data-driven risk monitoring is another strategy. Singapore’s Temasek Holdings uses satellite monitoring and biodiversity data to evaluate risks and opportunities linked to natural capital. New tools like Exploring Natural Capital Opportunities, Risks and Exposure (ENCORE) are emerging to help financial institutions identify nature-related risks.
Integrating climate and nature risks into daily management and fiduciary duty is also crucial. Long-term investors systematically embed climate-related financial risks into risk management processes, including carbon footprinting, fossil fuel exposure analysis, and physical risk assessment.
Developing investment frameworks that internalize climate risks is another approach. Frameworks like the Climate Resilience Investment Framework (CRIF) help investors identify, assess, and adapt to physical climate risks in line with fiduciary duties.
Holistic risk management including biodiversity is encouraged. Financial firms and insurers are encouraged to quantitatively integrate biodiversity and environmental risks into their risk management systems to reflect their growing materiality, moving beyond qualitative descriptions.
Engagement and long-term stewardship are also vital. Emphasis on active engagement with companies to encourage decarbonization and sustainability transitions, rather than short-term divestment, preserves and enhances the value of productive assets aligned with the Paris Agreement.
These long-term asset owners recognize that financial stability is tightly linked to environmental stability and that natural risks are material financial risks. They are therefore pioneering institutional changes including risk integration, data innovation, resilience planning, and collaborative initiatives, aiming both to mitigate harm and to invest in sustainable solutions while safeguarding generational wealth against worsening climate and nature crises.
The SDGs relevant to this story include Water (SDG 6), Economic growth (SDG 8), Infrastructure (SDG 9), Inequality (SDG 10), Cities (SDG 11), Climate (SDG 13), Oceans (SDG 14), Biodiversity (SDG 15), Peace (SDG 16), and Partnerships (SDG 17).
New initiatives like the Debt Suspension Clause Alliance and the Global Hub for Debt Swaps for Development are also emerging, signalling a shift towards a more sustainable and resilient financial system.
[1] Source: NatureFinance [2] Source: Devon Pension Fund [3] Source: Climate Resilience Investment Framework [4] Source: Financial Stability Board [5] Source: Building Bridges
- Long-term asset owners, such as pension funds and sovereign wealth managers, are integrating nature-related financial risks into their investment strategies to protect against planetary warming and environmental degradation.
- Norway's Government Pension Fund Global assesses up to 96% of its portfolio for natural capital risks, recognizing the material impact of environmental shocks on long-term asset value.
- Singapore’s Temasek Holdings uses satellite monitoring and biodiversity data to evaluate risks and opportunities linked to natural capital.
- Developing investment frameworks that internalize climate risks is another approach, with the Climate Resilience Investment Framework (CRIF) being an example.
- Engagement with companies to encourage decarbonization and sustainability transitions is vital, as it preserves and enhances the value of productive assets aligned with the Paris Agreement.
- New initiatives like the Debt Suspension Clause Alliance and the Global Hub for Debt Swaps for Development are emerging, signalling a shift towards a more sustainable and resilient financial system.
