The risks associated with climate change are beginning to be well understood by the investment community, with climate-related financial disclosures mandated in many jurisdictions. But there are fewer disclosure mechanisms relevant to people and communities in development to allow asset managers to account for social risk.

Climate change is expected to cause seismic social upheaval even without meeting critical tipping points or 4C warming. Heat stress, for example, could kill millions and trigger mass migration across the world.

According to Jakob Thomä, co-founder and research director at Theia Finance Labs, climate stress-test exercises, economic impact analyses or other risk exercises that seek to understand how climate change affects social stability and, by extension, the economic and financial impacts of social conflicts, are hard to find.

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“Our estimates suggest social risks could be amplified by two or three times when compared with direct climate risks. Consider a typical coup in Africa can cut GDP by half and forms faster than a hurricane over the Atlantic. Likewise, the Troubles in Northern Ireland ended up having a bigger impact on GDP than most mainstream estimates on the economic costs of climate change,” he says.

“Ignoring these risks is the functional equivalent of trying to understand if there is a shark in the water by just scanning the horizon for a fin. It cannot be ignored if risks are to be meaningfully mapped. But people have turned a blind eye to it because of how complex it is, and also the daunting implications one must think through when considering these risks for society more broadly.”

Maria Knapp, partner at global risk consultancy Control Risk, agrees. She says that, since people issues are harder to quantify, and there are generally fewer metrics relevant to social risks compared with SBTi-type climate risks, financial accounting for social risks is always going to be challenging.

One disclosure framework on the horizon is the Taskforce on Inequality and Social-related Financial Disclosures, which is aiming to launch in the first half of 2024 and develop a framework built on existing standards, benchmarks and ratings.

Read the full article in ESG Clarity’s November 2023 digital magazine.