We have learned that the way we frame choices greatly influences the decisions made. For example, the Ontario Securities Commission (OSC) has focused for several years on the application of behavioral knowledge to improve investor choices.

The OSC recognizes that the way financial service providers frame investment decisions tend to have a greater (and often negative) impact on those least able to bear the consequences of poor decisions.

The investor protection challenge faced by financial regulators has become evident at a more systemic and existential level in response to climate risk and adaptation.

Faced with the overwhelming evidence of accelerating climate change and the attendant enormous costs to people’s lives, the environment, and our social fabric, why corporate and investment communities – including many of the managers of most sophisticated funds – have they been relatively slow to focus on adaptation challenges and opportunities?

For one, like many of those who brake late when entering a sharp bend on a mountain road, they are firmly anchored in their path. Familiar habits and knowledge are the “comfort zone” for decision making and risk taking. It is difficult to recognize, let alone accept, paradigms that challenge past experience, even when it is clear that rising temperatures will threaten the health of vulnerable populations, as the likelihood of natural disasters increases. exponentially and that water scarcity will disrupt most industries.

Investors (as well as business leaders) are typically evaluated and rewarded based on performance measured over periods of one to five years. It becomes practical (and, seen from short-sighted, self-interested) to assume that the consequences of climate change (and the need to adapt) lie outside these deadlines. It’s a bit like the fable of the living boiled frog – if it fell into boiling water it would jump out, but it is less likely to perceive danger if the temperature slowly rises.

A third factor is our general tendency to discount the future. The farther we look, the more blurry our vision becomes, especially in relation to our ability to discern what immediately awaits us. The disparity between the ease of measuring current returns and the difficulty of measuring long-term risk creates challenges for good governance (corporate and public) and encourages procrastination when it comes to addressing what is. perceived as long-term risks where collective action is the only effective response.

The growing awareness that lives, physical assets, and social, financial and political systems are increasingly at risk is beginning to shift capital flows and management’s focus towards adaptation. This should accelerate with better reporting standards. It is unreasonable to expect fund (or company) managers to pursue environmental and social goals without providing them with some clarity on how their performance will be assessed. The refinement of these reporting standards so that they are rigorous and comparable and the shift in emphasis from describing activities to measuring results should contribute to a paradigm shift and facilitate the creation of a range of attractive investment opportunities. They will also strengthen the legal obligation to focus on resilience as a central part of risk management, investment and business stewardship.

Signs of progress abound. The European Union proposes to devote a quarter of its budget to climate action for the next six years. The US Department of Defense has requested more than $ 26 billion (US) to “replace, restore and modernize sustainable facilities to improve their resilience to climate events.” Bank of America projects the climate adaptation market to double to $ 2 trillion per year over the next five years.

Canada cannot afford to “brake late and hard”. Our economic well-being depends on an orderly transition. The fact that investors suddenly decide to pull out of oil and then see a huge spike in oil processing within a few years will be very disruptive to everyone. Hence the laudable emphasis of many players in the energy sector on adaptation. Industry is often at the forefront of this shift in mindset, recognizing that the carbon budget is limited and acting urgently to embrace a comprehensive energy system thinking.

Most organizations are now committed to taking ESG factors seriously, but lack the management tools to fully integrate them into their risk management, incentive structures and culture. Better indicators, which will inform public policies and private decision-making, should help drive ESG results forward.

As with any paradigm shift, there are huge first-come benefits to be realized. In this case, the change also bodes well for our collective approach to other systemic risks, from environmental degradation to the destabilizing effects of extreme inequalities and stigma.

And, unlike the incentives that often inform financial advice, a rapid shift in focus towards the need for climate resilience will have the greatest beneficial impacts on those most vulnerable to the consequences of poor decisions, on the quality of their lives (and that of their children) as well as the security of their savings.

Edouard Waitzer is a lawyer who chairs the Independent Review Committee on Standards Setting. He is one of the founding directors of the Sustainability Accounting Standards Board. Stephenie fox is Senior Vice-President, Financial Reporting and Assurance Standards Canada