'Selfish' risk assessments will never prompt climate action
The practice of risk management is ultimately about making fork-in-the-road decisions. Is it a good idea to underwrite this loan? Do we need to raise more capital to ensure solvency? Should I walk to the zebra crossing or attempt to cross the busy road right here? Should I make that off-color joke and risk a hit to my reputation?
We weigh up the costs and benefits associated with various outcomes, good and bad, and try to determine associated probabilities. We consider our own risk appetite – consciously or not – and make the decision for better or worse.
In many or most of the circumstances we face in our professional and private lives, risk management is a very selfish process. We have to make the best possible choices for ourselves or for the companies for which we work.
When we produce externalities – meaning when the welfare of others is affected by our decisions – the calculus changes quite a bit. In part this is because our own welfare, viewed selfishly, is often impacted when others are harmed, too. The reputational effects of the off-color joke are a prime example of this. In other cases, millions of decisions made by individuals acting selfishly can harm the welfare of the collective. In these cases, market failure occurs and governments play a critical role in developing rules and regulations to guide our individual choices in a socially desirable direction.
“Thanks for the reminder of Public Economics 101, Dr. Hughes, stop wasting my time.”
In situations where externalities and reputational effects are a key concern, which is certainly the case with climate-related financial risk, separately accounting for these different flavors may, I suspect, yield important insights about our behavior, the decisions we make, and our future prospects. We should understand the extent to which our decisions impact our own selfish interests and be able to contrast this with a broader view of risk that encompasses reputational repercussions and broader societal effects.