Physical and Regulatory Tipping Points in Green Finance

This decade represents our final chance to avert the most severe consequences of climate change while directing the world toward a net-zero future. According to the Intergovernmental Panel on Climate Change’s (IPCC) most recent assessment, Climate Change 2022: Impacts, Adaptation and Vulnerability, it is still possible to restrict global warming to 1.5 degrees Celsius.

At several Conferences of the Parties (COPs), it was agreed to restrict global warming to 2 degrees Celsius over pre-industrial levels by 2100, with attempts being made to meet an even more ambitious target of 1.5 degrees. However, this will need quick reforms in every sector, from electricity, buildings, industry, and transportation to agriculture, land use, and coastal zone management, as well as an urgent increase in carbon removal and climate finance.

Key points from the report include:

• • Some previously possible pathways to avoid the worst consequences of climate change are already lost.
• • Global ecosystems are highly integrated, meaning that acceptance of one tipping point significantly increases the probability of more following.
• • Any adaptation that is designed with short-term goals to avoid specific risks, often leads to unintended consequences, giving rise to other risks becoming ‘Maladaptation’

The 2022 IPCC report consists of detailed specific risks that are increasing by region, in tandem with temperature rise. With many regions such as Asia, the Small Islands, North America, Europe, Australasia, and Africa experiencing hazards as a result of climate change, it has become vital to take action.

The risks include:

• • Risk to water security.
• • Loss of terrestrial, marine, and coastal biodiversity.
• • Economic decline and livelihood failure due to biodiversity loss from traditional agro-ecosystems.
• • Climate-sensitive mental health outcomes, human mortality, and morbidity due to increasing average temperature, weather, and climate extremes.
• • Risk to freshwater resources leading to reduced surface water availability for irrigated agriculture.

• • Losses in crop production, due to compound heat and dry conditions, and extreme weather.
• • Coral reef ecosystems’ degradation due to coral bleaching.
• • Reduced economic output and growth, and increased inequality and poverty rates.

Climate change has harmed economic growth, made poverty reduction difficult, weakened food security, and created new poverty traps, notably in metropolitan areas and developing hotspots of hunger, throughout the 21st century.

These dangers can be combated by actively implementing hard, green, and soft infrastructure initiatives. Many nations have undertaken solutions such as changes to building construction standards, rainwater collection, energy sector resilience, and investments in greener technology. Existing and new economic devices can promote adaptation by incentivizing for predicting and mitigating consequences.

This has had a direct influence on how banks analyze climate stress scenarios. Stress tests are required by banks to examine the resilience of their balance sheets. Financial institutions are now required to assess the riskiness of present and prospective investments and credit facilities.

The Securities and Exchange Commission (SEC) issued regulations to assist banks in developing scenarios for stress testing. The policy requests:

• • Scope 1 and 2 disclosures from all filing companies
• • Physical and transitional risk identification and quantification
• • Upstream and downstream supply chain considerations

• • Use and Impact of carbon pricing

Banks may use this information to identify borrowers who have already taken actions to reduce physical hazards posed by climate change and alter their exposure and future credit profiles accordingly. This will enable the creation of green balance-sheet strategies and the right pricing of future climate-related credit risks into credit facility pricing.

Learn how GreenCap’s ‘Risk as a Service’ (RaaS) solution helps banks create and populate climate-based scenarios to reflect the impacts of the IPCC pathways and other regional plans.