The last couple of months have undoubtedly been some of the most difficult in our financial and human history of the last century. But should we be preparing for something even worse in the future?
This week, markets have been rallying on the hopes that the lockdown measures across the world could be eased, even as the death toll around the globe continues to rise. And it seems like the novelty and shock of the restrictions are beginning to fade a little as people settle into this new existence.
But it would be foolish to believe that the rally we have seen in equities is anything but a bear rally. After all, the lockdown measures across Europe are being extended and a scientific adviser to the UK government has suggested social distancing measures should be maintained until a vaccine is developed, which is going to take months. There are, it seems, not so many reasons for markets to be optimistic.
Yet increasingly, there are also suggestions floating around that this pandemic is but a rehearsal for a bigger catastrophe for which we are heading – climate change, which could have detrimental effects on our economy for decades, if not centuries.
Global financial services consulting firm Sionic is among thousands of voices calling for governments and financial institutions not to lose sight of this bigger problem, even as the more pressing fears over the coronavirus pandemic dominate news headlines and agendas across the globe.
The firm’s financial risk expert Paul Dobbs says: “The combination of complex chain reactions between degraded ecological conditions and unpredictable social, economic and political responses, and the risk of triggering tipping points, means that climate change represents a colossal and potentially irreversible risk of staggering complexity.
“Even today’s tragic events are a perfect example of what lies ahead. The collapse in oil prices and the demand shock inflicted by the coronavirus COVID-19 crisis offers financial institutions a live test run of an extreme climate risk stress scenario.”
Climate change, experts warn, could cause a similar and much longer lasting shocks for economies and financial institutions, and this pandemic should be a wake-up call for all of us. Financial institutions such as banks need to engage in complex stress testing and risk assessment to prepare themselves for the impact of climate change.
“Banks and financial institutions should not underestimate the amount of work required here given current stress testing exercises are already highly time consuming,” Dobbs says.
“The fact that in the near term, new data sources will need to be identified, additional scenarios via new risk factors must be created, new models will require development while new reporting streams will ultimately need to be operational, will result in more time and investment being allocated.”
But most importantly, governments need to ensure that climate change risk is not pushed down regulatory agendas as all eyes focus on the current crisis. After all, we only have “a finite number of years to act before it becomes too late”.
“Should this be left until the last minute the scale of change via new policy change will result in a larger proportion of assets being stranded creating a contagion of much bigger losses for both banks and investors,” Dobbs warns.