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Gilbert Tepetepe Correspondent
This article explains three types of climate risks and offer ways to prevent a climate Minsky moment during the transition from a high carbon-intensive to a low carbon economy in Zimbabwe.
As we pursue the decarbonisation targets set in our various national policies, the 2030 UN Sustainable Agenda, 2050 Paris Agreement and Vision 2030, it is necessary to avoid falling into a climate Minsky moment at all costs.
There is an urgent need to take early and orderly actions on implementing our climate mitigation, adaptation, and transition targets.
This is to avoid a disorderly transition which poses serious economic crises, societal woes, health problems, food shortages, and deleterious effects on humanity through a climate Minsky moment.
What is a climate Minsky moment?
The concept of a climate Minsky moment was popularised by former Bank of England Governor Mark Carney in his landmark speech Tragedy of the Horizon in September 2015.
Mark Carney argues that “too rapid and too slow transition” towards a green economy could materially damage financial stability, result in an economic depression and more global warming.
This is explained by the forward-looking framework that was developed by the Central Banks and Supervisors Network for Greening the Financial System. Four possible transition scenarios are suggested:
- Orderly transition scenario occurs when a government and businesses take early and ambitious actions to reduce greenhouse emissions.
- Disorderly transition scenario occurs when government and businesses take delayed or divergent, disruptive, sudden, and unanticipated action to greenhouse emissions. This increases transition risks.
- Hot house world transition scenario results when governments and business take limited action, leading to significant global warming and strongly increased exposure to physical risks as a result.
- Too little, too late transition scenario occurs when governments and businesses take a late transition action that would fail to contain physical risks.
A climate Minsky moment occurs under situations of disorderly transition, hot house world transition and “too little, too late transition”.
These situations may either exacerbate transition risks, stranded assets and cause financial crisis or increase physical risks and delimit the achievement of net zero.
Three major types of climate risks
Climate change poses physical, transition and liability risks. Overally, these climate risks have negative impact on human, social, physical, natural, and financial capital.
First, physical risks arise from gradual changes in climate, environmental degradation (air pollution, deforestation, biodiversity loss, water stress) and frequent extreme weather events (floods, storms, heatwaves, droughts, and veld fires). Directly, physical risks damages properties, reduces worker productivity, limits food production, increases psychological stress and negative impacts on employee health and safety. Indirectly physical risks lead to disruption of supply chains.
Our economy is undoubtedly more exposed to physical risks because of its reliance on primary industries.
Service sectors such as banking, insurance, tourism, and healthcare are directly impacted by these risks.
For example, the 2019 tropical Cyclone Idai directly impacted bridges, roads, electricity, agricultural land, crops, livestock, houses, water, transport, electricity and 270 000 people.
Second, transition risks are the direct or indirect losses emanating from the process of shifting to a green economy.
Transition risks are prompted by changes in environmental policies, regulations, technology, business models, customer preferences, and societal norms.
They are of more concern to our economy because our major sectors namely agriculture, forestry, land use, mining, energy, transport, and waste management are highly carbon intensive.
The risks of transition include possible decline in asset prices, income, and profitability to these sectors and those dependent on them.
Third, liability risks are a subset of physical and transition risks and may arise as legal claims either from those who suffered from the effects of climate change or those who wish to force a company or government to take more action against climate change.
Physical and transition risks are also drivers of existing risks, namely credit, operational, market and liquidity, real estate, reputational, insurance, strategic and systemic risks.
How to prevent a climate Minsky moment
A climate Minsky moment can be prevented by adopting a forward-looking philosophy and taking early and orderly action to climate change. The scale of our actions must move at equilibrium with requirements of orderly transition.
Hence our commitment to climate change must now start to reflect in senior management and board reports, CEO targets, agriculture, transportation, buildings, mining, energy, monetary policy, fiscal policy, waste management, and on financial statements disclosures.
How do we prevent a climate Minsky moment?
Just Go Green earlier in words and action!
Just Go Green to deal with climate change!
Dr Gilbert Tepetepe has a PhD in Finance from United Kingdom. He writes in his own capacity and the opinions expressed in this article are his own. Feedback on [email protected]
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