The growing case to embed climate risk in finance teaching

Financial Times

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Chief financial officers, chief ­investment officers and their teams are in a prime position to help embed ­sustainability in their organisations — from strategy and operations to financing and reporting. Yet the change required for many finance teams is ­substantial.

A recent survey of senior finance professionals by the charity Accounting for Sustainability suggests that the profession is responding: 88 per cent agree that it is “very important” or “essential” to transform financial decision making to address the opportunities and risks posed by environmental and social issues.

Most organisations have developed at least some tools to integrate sustainability, alongside traditional financial data, into decision making.

But only 9 per cent reported they were able to do so in a fully comprehensive way. Fifteen per cent felt they had the tools and techniques in place that they needed, though 46 per cent said these were under development.

Those of us who teach and conduct research in finance and accounting have a role to play to meet this demand.

We took part in a recent discussion between finance and accounting —professors and the Financial Times about best practices, successful innovations, and important concepts and themes.

It is now relatively uncontroversial to argue that climate change and nature loss bring direct risks to the profitability and cash flows of companies.

Physical risks arise from direct manifestations of climate change and include risks to firm facilities, operations, and supply chains.

Transition risks and opportunities arise for business as regulatory incentives and consumer preferences push towards, for example, a lower emissions economy.

Mobilising private capital towards mitigation of, and adaptation to, environmental change is vital. The rules of the road, as defined in finance textbooks, must be refined to help understand and manage these risks.

But there are divergent views on how to respond. Some participants in the discussion felt a responsibility as professors to inspire a fundamental overhaul of finance and accounting pedagogy, and thought the fiduciary duty of financial officers must be redefined to view climate and social action through the lens of “citizen investors”, who consider many non-financial objectives.

For them, a core course in finance would seek to question the very purpose of finance. Ideally, it would pursue what appropriate actions financial officers could take to fulfil their more ­broadly defined duties, what powers they should exercise, what purpose they serve, and what evidence

The full article is available here. This article was published at FT Markets.