Part of the job is to be aware of the cognitive biases which affect us all, so that we can lean against them. One particularly pernicious bias is ‘status quo bias’: the irrational preference for sticking with present choices over a change of course. There are plenty of reasons people fall prey to it: sunk cost thinking, a need to avoid regret, the desire to remain in control. The trick to correcting it is to remember that even though your present course is the path of least resistance, it can still be a very risky one.

Lately I’ve been thinking about status quo bias in the context of our global path on climate change. Our current course is characterised by insufficiently granular and accessible information about the risk of physical climate change to individual companies and investments. The cost of continuing down this path is hard to discern. But it is very real.

At DWS we are pioneering the incorporation of physical climate risk data into investment solutions in partnership with Four Twenty Seven whose methodology is a significant step forward for investors to assess and manage risks. However, we need to be able to assess the financial value at risk for any given company. For example, we need to be able to see how important any given factory or warehouse is to an overall company’s profitability. We need to be able to get answers to questions such as ‘how exposed is any given particular factory or warehouse to sea level rise?’ That entails the ability to answer subsidiary questions such as: is the unit in question a key production facility? Is it one of many? Could the company easily shift production to other sites? Such information will only come with improved company disclosure.

Second, we need better information from companies about how easy the risk is to mitigate and how much it is likely to cost to

do so. Once that is available, we will start to be able to assess the measures any given company is taking to improve their resilience, and even advise on the most efficient ways to respond to the threat. A company might, for example, be able to shift production very easily, improve their insurance cover or confirm it will actually be paid out in the event of climate-related damage. Better information would enable us to make better decisions when looking at these options.

Continuing on our present trajectory, without adequate visibility on these physical climate change risks, is also risky because of a number of macro factors.

For instance, Bank of England Governor Mark Carney has advised about the possibility of a ‘climate Minsky moment’ - a moment when a large number of market actors together begin to price in physical climate risk, resulting in a shock to prices. If this were to occur it could potentially be a severely destabilising market event, with devastating real consequences for the valuations of investments across a number of asset classes. At the first conference for financial regulators on climate risk in April 2018, Carney said that the re-evaluation of climate-related risks “could destabilise markets, spark a pro-cyclical crystallisation of losses and lead to a persistent tightening of financial conditions”[1].

Another macro risk of our current trajectory is the possibility that climate risk could undermine economic growth and prosperity, pulling down overall returns for all investors as capital is diverted to dealing with the consequences of physical climate risk rather than mitigating it in a timely and efficient way. Money spent rebuilding, compensating, and dealing with the aftermath of disasters is money not invested elsewhere in the economy.