There is a self-interested economic logic that often holds true for political questions relating to climate change. As reflected in the poll of public attitudes toward climate change commissioned by the WDR and published last month, citizens of the poorest countries—those most vulnerable to the physical impacts of climate change—are much more likely to rate climate change as “very serious” than are citizens of high-income countries, who possibly perceive themselves as less vulnerable. The shares ranking climate change as a very serious problem were: U.S. 31%, Japan 38%, and France 43%, in contrast to Senegal 72%, Kenya 75%, and Bangladesh 85%.
Yet, while the livelihoods of a fisherman in Senegal, a pastoralist in Kenya, and a rice farmer in Bangladesh’s delta might be the most immediately vulnerable to climate change, it’s worth noting that the assets of an insurance company on the U.S.’s Gulf Coast, a real estate investor in Japan, and a champagne-producing giant in France are vulnerable too.
However, according to a recently released report by Ceres (a U.S. coalition of investors and environmental groups), asset managers aren’t taking climate change into account. It’s not necessarily because they don’t accept the science. As discussed in chapter 8 of the WDR, popular willingness to accept the science depends on willingness to accept the resulting remedies. Only if people can accept the solution will they agree about the problem. Thus in Russia—even with its hundreds of brilliant scientists in everything from atmospheric physics to marine chemistry—where about 20% of GDP and 60% of exports are in the oil and gas sectors, only 23% of the public believes that, globally, most scientists “think the problem is urgent and that enough is known for action” to be justified—in contrast to the 51% average across the diverse countries included in the WDR-sponsored survey.
But for those whose job it is to look beyond one-dimensional economic interests, and take into account larger macroeconomic effects and potential localized risks, there is nothing to gain by ignoring the facts. And, in fact, as Evan Lehmann points out in the New York Times:
“Disbelief in climate change isn't always the reason behind inaction. Half of the surveyed money managers believe that significant risks are bearing down on a spectrum of sectors, especially utilities, power producers, manufacturing and the automobile industry. But 47 percent of those concerned managers don't incorporate an analysis of climate risks and opportunities into their due diligence process.
One reason for this is that they weren't asked to. Nearly half, or 49 percent, of respondents said investors do not ask them to look at corporate climate risks.”
I suggest a second reason. They might not know how.
The insurance and financial industries have a huge arsenal of tools for estimating and managing risk—the threat of a quantified shock, with some known probability distribution. This approach may be adequate to some shocks, such as regulatory risk, e.g., the probability of a given range of caps on emissions, but not to the more complicated—or at least less familiar—uncertainties that characterize the unfolding of the physical impacts of climate change. More and better data—of the sort provided by the CIA satellites but also data linking climate phenomena to socioeconomic effects—will help managers incorporate climate impact and policy risks.
But this endeavor will require more than plugging new data into the same spreadsheet models. It will also require some reworking of the models themselves, along the lines of a robust decision making framework, which is emerging as one of the most practically relevant and potentially transformative concepts advocated in the World Development Report.
As the World Bank begins the process of operationalizing the findings of this report, we hope lessons will emerge from our experiences in activities as diverse as water management and public finance. To inform our own efforts—and to preserve my already battered retirement fund—I also look forward to what lessons emerge from first movers in the City, on Wall Street, and in Hong Kong’s towering International Finance Centre.