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Climate Risk for Development
Climate change and society's response to it present financial risks and opportunities, which stem from two main channels:- Physical risks arise from the physical effects of increasingly severe and frequent climate and weather-related extreme events such as droughts, floods, 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 assets and infrastructure, 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.
Scope of Activities
The IDB Group supports its clients in identifying, assessing, and managing climate-related risks and opportunities. It does so through an integral offering encompassing:
Innovative Solutions
Financial and non-financial solutions supporting investments in climate solutions.
Business Models
Design and piloting of innovative business models.
Climate-related Financial Disclosures
Application of international recommendations and requirements.
Thematic Bonds
Issuance of thematic bonds.
Intersectoral Dialogue
Promotion of public-private dialogues on the topic through its Innovation LABs, and actively foster international knowledge sharing.
Why climate risks?
Climate-related risks influence the characteristics of traditional risk types and affect how those risks impact financial institutions. For banks, for instance, climate-related risks can manifest as increased credit risk, market risk, liquidity risk and operational risk.Primary channels for climate-related financial risks
Managing climate risk allows overcoming barriers such as:
- Financial instability due to climate change
- Reduced asset values and companies’ profitability due to physical effects of increasingly severe and frequent climate and weather-related extreme events
- Lower ratings by agencies as climate risk factors are incorporated into their credit rating opinions
- Rapid reassessment of a wide range of asset values through unanticipated or premature write-downs of carbon-intensive industries given an adjustment towards a carbon-neutral economy, prompted by changes in policy, regulations, technology, or market sentiment
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