Climate change ranks among the world’s greatest risks. A growing number of leaders and financial institutions are calling for action to reduce the impact of climate change on economic and financial stability by mainstreaming climate risk into investment decision making processes.
The World Economic Forum’s 2017 Global Risks Report ranks environment-related risks including extreme weather events, climate change and water crises among its top 5 global risks with extreme weather events emerging as the single most important global risk.
2016 was the hottest year on record with Latin American citizens continuing to confront extreme weather events. Climate change is increasing the likelihood and intensity of these events including droughts and floods. Since 2014, droughts have ravaged the Caribbean, Central America and Bolivia due low rainfall and exacerbated by El Niño. The social and economic costs are massive. For example, in the first three-quarters of 2016, extreme weather events cost U.S. taxpayers $27 billion in damages.
At its core, the Paris Agreement, which seeks to limit the rise in global temperature to well-below 2 degrees Celsius and align finance flows with low emission and climate-resilient development, is an attempt to reduce this risk. However, due to the inertia in the climate system, extreme events exacerbated by global warming will continue to pose major threats to our economies and citizens.
A recent report by the Inter-American Development Bank on climate risk and stranded assets aims to provide a deeper understanding of the potential costs and opportunities for decision-makers at the country, sector, financial institution and investor level.
Stranded assets are defined as assets that have suffered from unanticipated or premature write-downs, devaluations, or conversion to liabilities. Stranded assets can also include environment-related risks such as new government regulations, evolving social norms and consumer behavior, and litigation.
The topic has recently shot up the agenda due to changes in the real economy in various countries such as the drop in costs of renewable energy and also the entry into force of the Paris Agreement in 2016, which over 20 Latin American and Caribbean countries have ratified. Climate risk and stranded assets are especially relevant to Latin America and the Caribbean countries which are highly vulnerable to the physical effects of climate change and to regulatory responses to the phenomenon.
Climate risk could affect economic and financial stability and should be a top priority for governments and the private sector. These risks include:
- Physical risks: arise from weather-related events, such as floods and storms;
- Transition risks: financial risks from the transition to a lower-carbon economy;
- Liability risks: for insurance firms from parties who have suffered loss and damage from climate change, and then seek to recover losses from others whom they believe may have been responsible.
Join us this week as the IDB participates at an Inter-American Dialogue event on “Climate Risk in Latin America” on Wednesday, February 1, from 9:00 – 10:30 a.m.
Download our publication “Stranded Assets: A Climate Risk Challenge”