Understanding Climate Risk in Investment
In efforts to tackle climate risk, the CFA Institute has initiated foundational research aimed at reshaping the asset management industry. Marg Franklin, CEO of CFA Institute, emphasizes the need for new frameworks in investment strategies that incorporate climate risk. She points out that traditional systems and behaviors in the finance sector limit the ability to effectively address these risks.
The Net Zero Guide
The new paper, "Net Zero in the Balance: A Guide to Transformative Industry Thinking," authored by Roger Urwin for the CFA Institute, presents a comprehensive set of tools and strategies. These resources are designed to help industry professionals integrate climate considerations into their investment processes. The goal is to move from a backward-looking to a more forward-thinking approach.
Systems Thinking in Investment
A key focus of the CFA's initiative is on improving governance and organizational design through systems thinking, which is often underutilized in finance. Systems thinking involves viewing financial systems holistically to create effective and sustainable investment models.
Learning from Insurance
Franklin suggests that the finance industry could learn from the insurance sector. Often seen as a "canary in the coal mine," insurance provides early indicators of risk that asset managers might use to improve their climate risk assessments.
Overcoming Data Challenges
One of the significant challenges in incorporating climate risk is the quality and harmonization of data. Franklin notes the importance of overcoming these data hurdles, as well as the behavioral aspects that prevent effective risk management. The CFA's initiative aims to provide research and tools to address these issues.
Moving Forward with Meaningful Discussions
The CFA Institute's role is to foster meaningful discussions within the industry, offering a variety of educational tools and resources. Franklin hopes these efforts will lead to dynamic changes in how climate risk is managed, similar to the CFA's work on diversity, equity, and inclusion.
The overarching message is that asset managers and owners need to reassess how they incorporate climate risk into their investment strategies. By doing so, they can better align with net-zero goals while safeguarding investments against future climate uncertainties.
