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Climate Risk & Financial Institutions: Challenges & Opportunities

Climate Risk & Financial Institutions: Challenges & Opportunities

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Published by IFCpublications
The challenges presented by climate change are magnified in emerging markets, where most future global economic growth will take place. In these economies, climate change is shaping strategies to increase access to energy, clean water, and other basic services for people who need them most.

As they channel investment, financial institutions have an opportunity and responsibility to take a leading role in mitigating and adapting to climate change. Institutions managing investments in long-term assets should consider the financial risks associated with climate change, as well as the opportunity to create value by working proactively with clients and stakeholders to manage the risks.

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The challenges presented by climate change are magnified in emerging markets, where most future global economic growth will take place. In these economies, climate change is shaping strategies to increase access to energy, clean water, and other basic services for people who need them most.

As they channel investment, financial institutions have an opportunity and responsibility to take a leading role in mitigating and adapting to climate change. Institutions managing investments in long-term assets should consider the financial risks associated with climate change, as well as the opportunity to create value by working proactively with clients and stakeholders to manage the risks.

Stay Connected
http://www.facebook.com/IFCwbg
http://www.twitter.com/IFC_org
http://www.ifc.org/LinkedIn
http://www.youtube.com/IFCvideocasts
http://www.ifc.org/SocialMediaIndex

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Published by: IFCpublications on Jun 15, 2012
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In those investment sectors or regions

most vulnerable to the impacts of

climate change, the performance

of investment portfolios may be

increasingly threatened. In the absence

of a longer-term perspective on climate

change risks, institutions’ maximum

country or sector risk exposure limits

may become inadequate to protect

proft margins.

Research by McKinsey has investigated

how the drivers for carbon abatement

could affect sector and company

valuations (see Figure 1). As climate

change adaptation leads to new or

changed regulations, shifts in market

demand, and calls for the development

of climate-resilient assets and services,

it may have similarly profound effects

on the valuations of sectors and

companies, with consequences for

investors’ portfolio performance.

Mercer has partnered with a number

of institutional asset owners and

investment institutions to study asset

allocation strategies in light of climate

change (see Box 14).

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PART I CLIMATE RISK AND FINANCIAL INSTITUTIONS

Figure 1. Example of the Potential Impacts of Carbon Abatement Measures on Short- and Long-Term
Company Valuation for Four Selected Sectors

Source: Brinkman, Hoffman, and Oppenheim 2008

Box 14. Study on Strategic Asset Allocation in Response to Climate Change

Mercer, a global consulting, outsourcing, and investment services frm, announced in March 2010 that together with 14 institutional
asset owners and investors from around the world, the Carbon Trust, and IFC, it had recently launched a study exploring the potential
impacts of climate change on asset allocation. According to a news release from Mercer, the study will identify potential new
investment opportunities and possible future risks related to a variety of climate-change scenarios.

The research will explore volatility and correlations among asset classes, regions, and sectors under each scenario. Each study partner
will receive its own tailored report assessing the effects on its asset mix. General fndings will be made publicly available in the fourth
quarter of 2010, with the intent of encouraging fnancial intermediaries, such as investment managers, consultants, and research
frms, to develop tools, products, and services that facilitate appropriate responses to climate-risk scenarios. The report will also
consider recommendations for policy makers and industry bodies.

The news release stated that fnancing arrangements would be crucial for mobilizing capital to help meet government targets to
reduce emissions and to provide the funding required for adaptation to the physical impacts of climate change. Representatives from
partner institutions were quoted as praising the study for helping to steer investors away from high-carbon investments and toward
those that would succeed in a low-carbon business environment, and also for helping institutional investors fulfll their fduciary duty
to manage the fnancial impacts of climate change.

Source: Mercer 2010

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PART I CLIMATE RISK AND FINANCIAL INSTITUTIONS

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