Do you remember how Value at Risk (VaR) – the risk-management metric – came in for much criticism after the financial crisis of 2008? It was once compared to an airbag that works all the time except when you have a car accident.
Now simplistic metrics that cover environmental risks are being characterised as dangerous, potentially leading to errors in asset allocation. Described as very simple measures that can “look great” from some angles, but which are based on very complex models that might not be entirely trustworthy, metrics are limited in how they can capture different concepts relating to ESG.
A key problem is the need for greater consistency in how companies report on climate-related issues such as emissions. But there are some fixes, such as breaking down short, medium and long-term risks to distinguish between ‘known knowns’ and known unknowns’, we are told.
Nevertheless, for one contributor to our article, modelling and measuring environmental risk is one of the “greatest challenges I’ve seen in my investment career”.
Nick Fitzpatrick, Group Editor, Funds Europe
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