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Climate Risk for Development

Climate change, and society’s response to it, present financial risks and opportunities to financial institutions and corporates. These risks, or opportunities, can stem from two primary channels:

  • Physical risks arise from the physical effects of increasingly severe and frequent climate and weather-related extreme events such as droughts, floods or hurricanes, and from longer-term progressive shifts in climate patterns such as increasing mean temperatures and changes in precipitation. These events can result in direct damages to property and other infrastructures, disrupt supply chains or impact of agricultural output, thereby reducing asset values and companies’ profitability.
  • Transition risks arise from the process of adjustment towards a carbon-neutral economy and be prompted by changes in policy, regulations, technology, or market sentiment. Policy changes could for instance take the form of restrictions on carbon emissions, the implementation of carbon pricing or the tightening of energy efficiency standards. These changes can translate in rapid reassessment of a wide range of asset values through unanticipated or premature write-downs of carbon-intensive industries.
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