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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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06/15/2012

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Demand in Some
Investment Markets
is Sensitive to Climate
Conditions

Weather and climate play a signifcant

role in affecting consumer preferences.

People tend to consume different

kinds of products in different weather

conditions and in different seasons.

For example, higher temperatures

will affect demand for energy, as the

need for heating decreases in winters

while the need for cooling increases in

summers. Although the actual impact

of this demand shift will vary depending

on the region and the season, in

general the increase in cooling is

expected to more than offset the

decrease in heating (IPCC WGII 2007).

Peak demand levels will also

increase, in response to higher peak

temperatures, potentially forcing

energy producers to build expensive

peak-load plants or to buy energy

on the open market at a high cost.

Decreased heating demand in winters

may damage natural gas companies’

bottom lines.

Investments in energy production,

distribution, and supply may need to

deal with important shifts in consumer

demand due to changing climate

conditions, with consequences for

income. Investments in water resources

and agricultural raw materials (or in

businesses that depend on a consistent

supply of energy, water, or agricultural

inputs) are likely to be affected by

changing patterns of consumer demand

as a result of a changing climate.

Climate Change
may have Impacts
on Macroeconomic
Factors that Determine
Investment Returns

Direct climate change impacts in one

industry may create a ripple effect of

resulting impacts on other industries,

particularly those with global markets

or long and complex supply chains.

Climate impacts on the energy,

agribusiness, oil, gas, mining, forestry,

and other nonmanufacturing industries

with large fxed assets (such as metals

production) may affect the prices of

the commodities they supply to other

sectors.

93

PART II CLIMATE CHANGE AND INVESTMENT SECTORS

For example, as will be discussed

further in Section 13, climate change

can affect crop supply and quality.

Coupled with higher demand due to

population growth and increasing

affuence, these impacts could trigger

sharp food price increases, with

fnancial consequences for food-

processing industries. Investments

in food-processing industries may

see their market position change

signifcantly, as climate-related impacts

on agricultural output affect commodity

prices (see
Box 4).

Additionally, climate-related commodity

price changes may have an effect

on foreign exchange rates for

countries that rely on foreign trade

in commodities for a large portion of

their GDP (see Section). Investments

denominated in currencies other than

U.S. dollars may then be exposed to

increased exchange-rate risk.

Some Markets will
Contract as the Climate
Changes, but there will
Undoubtedly be New
Opportunities

The spread of vector-borne diseases

such as malaria, dengue fever, and

diarrheal diseases will increase

demand for vaccines, medication, and

other products and services from the

pharmaceutical industry.

Box 4. Implications of Climate-Related Changes in Agricultural
Outputs for Trading Markets

India is one of the world’s largest producers and consumers of sugar. Droughts in
2009 caused a sharp reduction (44 percent) in Indian sugar output projections for the
end of the year. As a result, sugar prices hit a three-year high in early August 2009 on
the New York Stock Exchange, while also reaching their highest levels in 28 years on
the London Stock Exchange.

Overall, sugar prices rose by 64 percent in 2009 on the expectation that India would
become a net importer for two years in a row.

Sources: Lesova 2009; Mukherjee 2009

Engineering frms could also see

increased revenues from designing,

building, and operating assets and

infrastructure that are more climate-

resilient and energy-effcient and that

utilize renewable-energy resources.

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