If there is one thing that finance gurus should be good at, it is risk management.
Of course a lack of risk management in banking and finance caused the GFC and almost sent the global economy into another great depression.
But having learnt the lesson once, three of the world’s heaviest hitters in global finance have joined forces to overhaul the way we see climate change.
Former US Treasury secretary Hank Paulson, former New York mayor and founder of the Bloomberg media empire Mike Bloomberg and retired hedge fund billionaire Tom Steyer have founded an organisation called “Risky Business” .
Other members of their committee include two other former US Treasury secretaries Robert Rubin and George Schutlz together with former and current business and political leaders.
What’s really important about this group is that it includes both sides of the US political divide – bridging the “aisle” as they call it on Capitol Hill.
Risky Business wants to move the debate along from the yes/no, advocate/deny approach that has so polarised debate for the past decade and stalled a solution.
Rather they want to take a risk management focus to climate change and to look at the cost of not doing anything as opposed to many politicians around the world who look at the cost of doing something. Put simply, they want to look at the cost, in an accident, of NO car insurance rather than the premium paid FOR car insurance.
The Risky Business report on the impact of climate change on the United States, released yesterday, begins with the following quote from Mike Bloomberg:
Damages from storms, flooding, and heat waves are already costing local economies billions of dollars — we saw that firsthand in New York City with Hurricane Sandy. With the oceans rising and the climate hanging, the Risky Business report details the costs of inaction in ways that are easy to understand in dollars and cents — and impossible to ignore.
Released on the same day that Melbourne was struck by a massive storm and Southbank flooded after the Yarra broke its banks, it’s hard to ignore this report’s obvious correlation with the Australian economy and property market when it says that in the United States:
by 2050 between $66 billion and $106 billion worth of existing coastal property will likely be below sea level nationwide, with $238 billion to $507 billion worth of property below sea level by 2100.
That’s not a property I’d like to own or, crucially, a mortgage I’d like the bank I am a director of to have lent against.
But it is not the claims of loss to the economy that are the key to this report, although they are brought into stark contrast with a regional breakdown across the United States.
Rather, it is the process for evaluating risks which is possibly the greatest contribution of Risky Business to the climate change debate.
The document is littered with the language of risk management and probability:
- There is a 1-in-20 chance — about the same chance as an American developing colon cancer; twice as likely as an American developing melanoma — that
by the end of this century…
- I know a lot about financial risks — in fact, I spent nearly my whole career managing risks and dealing with financial crisis. Today I see another type of crisis looming: A climate crisis. And while not financial in nature, it threatens our economy just the same.
- If you can’t measure it, you can’t manage it
- To plan for climate change, we must plan for volatility and disruption.
- Talking about climate change in terms of U.S. averages is like saying, ‘My head is in the refrigerator, and my feet are in the oven, so overall I’m average.’
- If we were told — in any sphere — that we had at least a 90% chance of averting a disaster through changes we ourselves could make, wouldn’t we take action?
But the final word and the most telling point of this document as to how Risky Business hopes to change the debate on a fundamental level is in the conclusion to the report which says:
When Risk Committee member George Shultz was serving as President Reagan’s Secretary of State in 1987, he urged the President to take action on that decade’s hotly-contested scientific issue: the ozone layer.
As Shultz later said in an interview with Scientific American, “Rather than go and confront the people who were doubting it and have a big argument with them, we’d say to them: Look, there must be, in the back of your mind, at least a little doubt. You might be wrong, so let’s all get together on an insurance policy.”
That insurance policy became the Montreal Protocol on Substances that Deplete the Ozone Layer, an international treaty still in effect to this day.