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The global transition to renewable energy systems will be mineral intensive and, under the current linear economy conditions,...
Financing Climate & Sustainable Development
Distinguishing between planetary, economic, and financial risks, and the six distinct policy responses to them. This paper examines a range of public and private institutions whose mandates relate to those responses in distinct ways.
“Climate risk” is routinely treated as a single problem, along with the assumption that different institutions measuring and responding to it will pull the economy coherently toward planetary safety. In practice, this is not the case. The term conflates three distinct things: the planetary hazard itself, the economic damage it can produce, and the financial losses that may follow.
Transmission across these layers is partial and delayed. Exposure distribution, buffers, and market expectations determine how much physical damage becomes economic loss, and how much economic loss reaches financial balance sheets, so a great deal of the hazard never registers as financial cost within the horizons that govern prudential decisions.
This paper distinguishes among these three types of risk and six distinct policy responses to them: mitigation, resilience, risk sharing, fiscal resilience, exposure management, and financial system stability. It examines a range of public and private institutions whose mandates relate to those responses in distinct ways.
The paper makes the case that this conflation has come at real cost. It has directed resources, time, and political capital toward approaches that cannot deliver what is expected of them. It has created busy work of measuring, disclosing and reporting information that is not decision-useful, distracting from effective approaches to mitigation, the only response that reduces the underlying hazard. It loads institutions with expectations that are misaligned with their mandates and tools, and undermines the tools and focus they do need to manage the risks they actually face. And finally, it obscures mounting trade-offs that are left unmanaged, compounding the underlying problem: more accumulated risk, sharper tensions, and less fiscal space to meet them.
Only mitigation reduces the underlying hazard; the other five responses manage its consequences downstream. Disentangling these categories does not lower ambition. It is a precondition for responding effectively to climate risk: matching each objective to appropriate institutions and tools, and directing effort toward the structural barriers that determine whether the transition can be financed at all.
This report has been prepared by Lisa Sachs, Director, Columbia Center on Sustainable Investment (CCSI), and Associate Professor, Columbia Climate School, with support from Danielle Fujimoto and Quentin Harel, both candidates for the Master of Science in Climate Finance, Columbia Climate School. The authors are grateful for the invaluable feedback from Judson Berkey, Andrew Bowley, Linda French, Martin Hansen, Tomohiro Ishikawa, Rakhi Kumar, Oliver Moullin, Caspar Siegert, Rachel Sumption, and Perrine Toledano who reviewed earlier versions of this paper. The views expressed in this report are those of the authors and do not purport to reflect institutional views of Columbia Center on Sustainable Investment or Columbia University, nor of any supporting institutions or peer reviewers. The authors maintain full editorial control over the content of this report. Any errors or omissions remain the responsibility of the authors. CCSI received financial support from the Liberty Mutual Climate Transition Center for the preparation of this report.
