Course launched to aid understanding of climate change risk in finance

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The University of Edinburgh launched its online Climate Change Risk in Finance course (CCRiF) to ensure the financial services industry was well-prepared for rapid transformation.

And with recruitment open for the third course, Dr Luca Taschnini highlights the need to keep content fresh and relevant – to equip employees with both an understanding of regulatory change and the skills to interpret its effects on their business, and the wider market.

Dr Taschini, CCRiF course leader, says: “Monetary regulation relating to climate change has been evolving quite significantly – we have gone from ‘please do these things’ to ‘you have to do it’ and we’ve probably moved a little bit too fast. By this year, many financial institutions will be mandated to report in detail how climate change affects their activities.”

“So what is your exposure, as a financial institution or institutional investor, to physical climate change and to transition risk, or regulatory risk? That’s a massive question requiring a good understanding.”

To assist in that understanding, the online course uses detailed pre-recorded materials – and about a third have already been re-recorded and updated from course one due to the pace of regulatory change.

“When we designed the course session for this area, the Bank of England and European Central Bank were about to start this exercise,” says Dr Taschini. “Now they have published initial results and this is not just an update, it’s almost a new universe.”

The course was created when financial services organizations started asking for more information about climate change risk. “There was clearly a need for executive education about all the elements connected to these changing regulations,” says Dr Taschini.

The course has attracted employees from a range of roles, including credit risk, market risk, operational risk – pretty much anyone who needs to understand on a daily basis, how climate change might affect the way that they assess risk.

It has also attracted employees from large pensions companies, investment houses and banks – including Scottish Widows, which enrolled 30 directors and managers on the CCRiF course.

Stephen Porter, Responsible Investment Lead at Scottish Widows, explains: “Working in financial services, we need to be proactive, educate ourselves and determine what we need to know and the depth of what we need to know [about climate change].

“Achieving 1.5 degrees is still just possible and there are solutions that are investable that can deliver returns. Courses like this allow us to educate ourselves to be able to be positive actors.”

Course content ranges from the generic to the highly specific, with the University encouraging feedback to ensure freshness and relevance, Dr Taschini explains.

“We have modules where we talk broadly about climate change and the role of financial players in the transition to a low-carbon economy. Then there are specific sessions dedicated to compliance work and others for those in portfolio roles where they have to distinguish potential losers and winners in this climate space.

“I’m personally delivering three sessions, including a couple on physical risk effects on different markets, which has been updated to keep tabs on the evolution of science, as well as changing regulations.”

Dr Taschini uses the complex world of carbon pricing, carbon taxes and carbon border adjustments as another specific example of fundamental change.

“There is a lot happening that is significantly changing the way governments – and therefore financial services industries – operate. There is detailed discussion about CO2 emission permits, and potential differentials which require carbon border adjustments if you are importing from countries that don’t have an equivalent measure. Europe is seriously considering imposing an adjustment – and just that consideration has pushed countries like Russia to consider an equivalent measure. Five years ago, that was completely off the table.”

Dr Taschini says banks, asset managers and pension companies are increasingly well-prepared to tackle climate change risk as they move quickly to “update their tools”.

He explains: “The insurance industry has been light years ahead, given the nature of their business – but I’d say everyone is relatively well-prepared in understanding that they need to report. What is lacking is a tested theoretical framework to answer a lot of the questions that regulatory authorities are asking, about specifically what they need to report and how we measure that.”

Stephen Porter says there are different drivers in financial services to fully embracing climate change risk into its daily business: “There is a lot of pressure. Customers are demanding this sort of thinking be included within investment decisions. Financial services does have a key role to play and this has been recognized from a regulatory perspective.

“ESG [Environmental, Social and Governance considerations] needs to be embedded in what we do because we need to disclose and report how we are incorporating climate change into our investment decisions.”

Dr Taschini agrees pressure started from the regulatory side but has become broader: “Regulation initiated the conversation – it was ‘You’ve got to do this’. However, that quickly evolved into an opportunity to develop new products and maybe become a leader in offering certain services, understanding how clients could do better.

“For example, there were debates about whether you could identify a situation where more energy-efficient households were in, in general, better creditors. Analysis of that evolved into an opportunity for large banks to offer discounted mortgages – because they understood credit worthiness was better, because of the analysis, and could lend at lower-than-usual rates.”

Stephen Porter says the course has given Scottish Widows’ employees exposure to academic thinking which can be adapted to their daily work.

He explains: “It allowed staff to discuss challenges within this space and for us to learn from each other and others on the course. The course content highlighted nuances in discussion around ESG which was useful because, as practitioners, we would not normally have exposure or access to the more theoretical side.”

Porter says ESG knowledge is now vital for those working in the industry.

“ESG and climate change knowledge and how that will impact companies and investment decisions is now becoming fundamental,” he says. “It is going to be a baseline function and is now feeding into the Chartered Financial Analyst exam. If you don’t have this knowledge, you are not going to be in the running for influential positions.”

And change will keep on coming. Accounting standard-setter the IFRS Foundation announced the creation of the International Sustainability Standards Board at COP26 in Glasgow to oversee the development of a new reporting framework covering ESG issues.

The new body plans to start work on climate disclosure standards – to meet investor demands for “transparent and comparable information” on firms’ climate risks and opportunities and act as a shield against ‘greenwashing’.

“The pace of change will not slow down in this area and the financial services industry is really grasping that,” says Dr Taschini, “This course will evolve to reflect further regulatory change and financial service organizations need to see it as a continuous process. When it comes to climate change and risk, there is no standing still.”

Recruitment for the third Climate Change Risk in Finance course closes on 25, February. The course starts on 28, February. Register here or to discuss group bookings, contact [email protected],

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