New report offers concrete steps for risk-informed investment
The United Nations Office for Disaster Risk Reduction (UNDRR) launched a new report this week - Delivering risk-informed investment: addressing the barriers - which offers eight concrete areas where stakeholders can take immediate action to incorporate disaster risk into their investment decisions.
The report warns that a variety of “large-scale, dynamic, nonlinear risks” will dominate the 21st century, requiring significantly more risk-informed investment. While climate change associated risks have begun to permeate the financial landscape, those triggered by other kinds of hazards remain largely external to financial decision-making. Investments that assess multiple sources of risk and the ways they may interact in complex and cascading ways are considered ‘risk-informed’ ; however, few investment decisions currently fall into this category.
More than 300 potential hazards - including environmental, technological, biological, chemical, geopolitical and others - have the potential to significantly impact the world’s financial services sector. The recent COVID-19 global pandemic has demonstrated how one hazard can have reverberating effects throughout all of society.
“COVID-19 is the textbook example of how risks can cascade throughout value chains, across geographies, and throughout communities and the wider macro-economy,” write the authors. They go on further to say that the pandemic “presents a unique opportunity for governments to facilitate and require a multi-hazard approach in public and private investment decisions as part of economic recovery budgets and planning.”
A consultation process with key stakeholders identified four key areas as barriers to risk-informed investing: Evidence, Rationale, Oversight, and Advocacy. These areas can be summarized as follows:
- Incomplete risk understanding (Evidence). Many governments, businesses and financial institutions generally lack awareness and knowledge about the wide range of hazards, as well as their interconnections and amplifying effects.
- An unproven case for investing in DRR (Rationale). The financial rationale or business case behind the costs of disasters and the value of resilience measures is insufficiently evidenced. Developing relevant financial modeling, materials and case studies could make the case more compelling.
- Limited multi-hazard governance and oversight (Oversight). There is a strong need to support national governments and national financing bodies as they consider the negative externalities that some economic activity creates.
- An incomplete DRR storyline (Advocacy). Short-term thinking and lack of a positive narrative impact willingness to consider the value of risk-informed investing.
Using these four key areas as guidance, the report recommends eight areas where stakeholders can take immediate, concrete actions that lead to tangible change. “Actions were screened based on how concrete and specific they are and the degree to which they can be readily implemented,” the authors write. “They are not exhaustive but provide an immediate starting point.”
The report provides detail and examples for each of the eight steps, including which actors are best positioned to carry out each specific step. In brief, they can be summarised as follows:
- making base data available to better assess risks on a range of hazards;
- developing methodologies, guidance and/ or evidence that show the cost-benefit of risk-informed investing;
- packaging information and materials in usable ways that demonstrate how DRR considerations can be included in financial decision making, public spending and budgets;
- developing thought leadership and guidance on legal liabilities for company directors to assess and disclose disaster risks as part of annual reporting;
- exposing regulatory obstacles to risk-informed investing;
- developing frameworks and international standards that improve oversight;
- crafting a more positive narrative around resilient investing and the Sendai Framework and;
- advocating for a shared understanding about the need for the financial sector to integrate DRR into decision making.
Risk-informed investing has been identified as critical by the Sendai Framework, which was agreed to by all UN Member States in 2015; and it will also be crucial for meeting the 2030 UN Sustainable Development Goals, which call for more resilient and sustainable global economies.