Introduction

The report takes a position on the understanding of climate change and the potential risks that it poses to both the planet and investments worldwide. It starts with laying out the dire consequences of continued inaction on the matter and how it will impact economies, firms, and investors. The report views climate change as a systemic risk that investors need to take very seriously. Furthermore, it applauds the global efforts that have been made to mitigate climate change and looks forward to even greater change in the industry spurred on by investors who make rational and informed decisions.

Physical and transition risks

The discussion on physical risks starts with highlighting the different complexities that come with both transitional and physical risks. In essence, transitional risks stem from policy changes aimed at mitigating climate change, while physical risks emerge from the direct and indirect implications of climate change. Firms and investors need to understand these risks and incorporate them into their decision-making matrix when it comes to investing in the financial market.

Carbon pricing and scenario analysis

This part of the report hinges on the possible fallout from carbon-footprint pricing in regards to investments in the financial market. The report argues that fully functioning carbon pricing can make the most of markets function more efficiently than they have been in the past with externalities that make the market less efficient. The introduction of carbon pricing will help price the cost of transitioning to a low-carbon economy. Carbon pricing will also make it clear the cost of continuing to operate under the current carbon framework. The report also highlights the importance of scenario planning in investment in ensuring that portfolios are resilient to future changes in climate externalities.

ESG integration

The report looks toward environmental, social, and governance themes and suggests that there is a need to integrate technical and material expertise into the overarching investment process. With an appropriate level of expertise, investors will be better placed to challenge the popular notion that investments that integrate ESG factors will underperform those that do not.

Issuer disclosures

An issuer is a company in the market that issues shares and bonds. This part of the report recognises the need for issuers to provide transparency and relevant climate-specific information so that investors can take informed decisions. The report recommends that lifting of green-washing practices can be achieved by better issuer disclosure in their financial statements. Better disclosure acts as a countermeasure to reputational risk, which is associated with continued sustained inappropriate practices on climate policies by a company.

Investor action

The report suggests that investors must be proactive in considering the risks identified in the report—integration of physical and transitional risks and appropriate use of scenario analysis and carbon pricing—to make informed decisions. CFA Institute encourages long-term approaches to investment and risk management concepts that will make businesses of all sizes more resilient against climate risks. Climate-related risks will become as systemic and strategically important as they are, investors must act now.

Conclusion

The report calls for a robust understanding of climate change-related risks to environmental and financial sustainability in business. Investors should focus on what is important, and this report identifies carbon pricing, scenario analysis, and integrated ESG themes as essential areas for investors to take action. By taking a proactive stance in understanding and better managing the potential risks associated with climate and the environment, businesses can implement a level of informed decision-making. The report concludes that this informed approach melds sustainability with longevity and aims to safeguard the industry well into the future.