The challenge
The transition to net zero emissions will require the mobilisation of significant investment in new capital equipment and infrastructure. Governments do not have the capacity to do this alone, and society will need private capital to help fund the transition. However, investors are wary of making large investments in long-lived assets because of the risks posed by the transitioning economy as well as by climate change. With an end to stationarity – where the past is no longer a reliable pointer to the future – traditional methods of managing risk are no longer fit for purpose. Pricing risk in these circumstances in very challenging.
Why this research is valuable
As we shift to a Net Zero Economy and contend more extreme weather events, higher ambient temperatures, changing rainfall patterns, investors will need better tools to assess risks. We are exploring new methods and metrics to measure the impact of climate change and the impact of the transitioning economy on businesses. These methods will be transparent, robust, useful and auditable.
Environment Impact on Business and Markets — Research areas
- Determining how the science of climate change and climate models can be used to support business and investors to make decisions that mitigate risks arising directly from climate change.
- Exploring how companies and investors can i) measure their transition to a low carbon economy and ii) determine whether claims made towards progress on net zero are real.
- Investigating the role accounting will play in the management of these physical and transition risks. For example, we are assessing whether annual report drafters can be expected to make use of and translate climate model outputs and, if so, whether this information can be audited and by whom.
- Investigating whether business, insurers, banks and investors can mitigate their risks and what this means for society as a whole, including whether such decisions are in society’s best interests.