Climate risk ownership in the age of asset management

With a recent green climbdown in global finance including the world’s largest money manager BlackRock leaving the high-profile Net Zero Asset Managers group, the debate on the financial risks from climate change is reignited. While there is an agreement on the catastrophic potential of unmitigated climate change itself, many important players in the global financial system have reevaluated to what degree climate risk equals investment risk. A key point in this debate is who owns the financial risks from climate change and who is subsequently responsible for managing them. This study looks into the question of climate change risk ownership by examining two megatrends unfolding in the global financial system over the last three decades: the financialization of climate change and the parallel evolution of the asset management industry. The analysis shows how the interconnection between these two trends has resulted in a financial system where climate risk disclosure demanded by newly introduced regulations such as TCFD and intended to enhance risk management, actually enables private entities to shield profits from climate-related losses, while leaving systemic risks unaddressed. Drawing on the literature from the financialization of nature, risk ownership, and climate risk assessment, the study highlights how technological advancements in climate risk models and government incentives for low-carbon investments create adverse selection and moral hazards for both physical and transition risks from climate change. Introducing the concept of ‘climate risk ownership’ through case studies on renewable energy investments and disaster insurance, the study highlights the gaps in the management of the financial risks of climate change between public and private entities.