Climate Risk for DevelopmentClimate 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.
As evidence by the increasing number of climate-related legal cases brought forward to courts, liability risks is another source of climate-related financial risks. Such risks, which can be considered as a sub-set of transition or physical risks, can emerge from legal action taken against financial institutions or corporates hold responsible for loss and damage resulting from the effects of climate change
Physical risks and the transition to a carbon‑neutral economy also bring opportunities to financial institutions such as the financing of investments in energy efficiency, renewable energy, zero-carbon transportation, or climate resilience solutions. Corporates investing in such solutions stand to benefit by gaining a competitive edge vis-à-vis competitors.
First, to raise the perception of urgency about climate change actions. To this end, it presents the best practices in the region such as leadership in thematic bonds, clean energy projects as well as support to large corporations, financial institutions and sustainable infrastructure developers (social, transportation, water and energy).
Financial institutions are exposed to climate-related risks and opportunities through their lending and other financial intermediary activities, and through their own operations. For instance, banks that provide loans to companies with high greenhouse gas emissions profiles, such as fossil fuel producers, may accumulate climate-related risks via their credit holdings.