A Cambridge study, to which I contributed, quantified the potential loss to diversified portfolios due to a shock to the system, and how much of that loss could be hedged. The finding was that “no strategy will offer more than 50% coverage” of the negative impacts of climate change. This suggests that using environmental, social and governance (ESG) factors to search for alpha may not be as effective an investment strategy as using them to enhance the stability of the financial system as a whole.

Financial institutions and regulators worldwide recognise the need to transition from solely assessing climate risk to considering the actual climate impact of the financial sector. This led to forming The Network for Greening the Financial System, which was founded in 2019 and, as of June this year, had 127 central banks and supervisors on board and 20 observers.

But the consideration of climate impact is just the beginning of a broader shift towards addressing planetary boundaries. The Stockholm Resilience Centre has identified nine core planetary boundaries, including biosphere integrity, land system change and freshwater change. Six of those nine have been crossed. [As discussed elsewhere in this issue], such pressures mean that regulators are increasingly concerned that financial institutions should report not only on climate risk but also on their impact on biodiversity – the loss of which is a complex systemic threat. The global rollout of the Taskforce on Nature-related Financial Disclosures has received explicit support from the G7.