Inter-American Development Bank
facebook
twitter
youtube
linkedin
instagram
Abierto al públicoBeyond BordersCaribbean Development TrendsCiudades SosteniblesEnergía para el FuturoEnfoque EducaciónFactor TrabajoGente SaludableGestión fiscalGobernarteIdeas MatterIdeas que CuentanIdeaçãoImpactoIndustrias CreativasLa Maleta AbiertaMoviliblogMás Allá de las FronterasNegocios SosteniblesPrimeros PasosPuntos sobre la iSeguridad CiudadanaSostenibilidadVolvamos a la fuente¿Y si hablamos de igualdad?Home
Citizen Security and Justice Creative Industries Development Effectiveness Early Childhood Development Education Energy Envirnment. Climate Change and Safeguards Fiscal policy and management Gender and Diversity Health Labor and pensions Open Knowledge Public management Science, Technology and Innovation  Trade and Regional Integration Urban Development and Housing Water and Sanitation
  • Skip to main content
  • Skip to secondary menu
  • Skip to primary sidebar
  • Skip to footer

Sostenibilidad

Just another web-blogs Sites site

  • HOME
  • CATEGORIES
    • Agriculture and Food Security
    • Climate change
    • Ecosystems and Biodiversity
    • Environmental and Social Safeguards
    • Infrastructure and Sustainable Landscapes
    • Institutionality
    • Responsible Production and Consumption
  • Authors
  • English

Financial Institutions need tools to address climate risks in their portfolios

September 27, 2018 por Svante Persson Leave a Comment


Climate change will have broad implications on how financial institutions identify, assess, and manage a range of risks and opportunities. Whether in the form of the physical impacts of climate change or transition risks due to the policies and market shifts to stabilize and reduce greenhouse gas emissions– many financial institutions are gradually recognizing the importance of understanding and addressing climate risks in their existing portfolio and operations, as well as in pipeline and future investments.

Financial institutions have been aware of the issue of climate risks for more than 10 years, but more recently, the increased frequency of extreme weather events as a result of a warmer planet have raised concerns that physical impacts from climate change could potentially pose a significant financial exposure for banks’ portfolios across all asset classes. Financial institutions have begun to recognize that adapting to these changes is not only about physical infrastructure but also about how they are exposed financially to these climate risks.

The recent report of the Task Force on Climate-Related Financial Disclosures (TCFD) underscores this growing recognition of the materiality of climate risks in the private sector, and especially to the financial sector. The TCFD report outlines emerging issues regarding the disclosure of physical, liability and transition risks associated with climate change and will prove a useful roadmap to engage private companies and financial institutions to address their specific knowledge gaps and climate vulnerabilities and to develop resilience metrics, analytics, and standards.

The private sector usually frames climate risks from a risk management perspective, and are more often taking practical steps to protect business operations and continuity, supply chains, and property.  Even so, businesses find it very difficult to calculate the returns on resilience investments due to the uncertainty of climate-related risks and how bad their effects will be. Now, a growing number of analysts view one organization’s climate risk as another’s opportunity, as reflected by the demand for private “climate resilience solutions,” or products and services that protect buyers from a range of climate risks. In the agricultural sector, these include new weather and climate analytics, climate-resistant seeds, crops, and methods, financial and insurance products that incentivize resilience building, water-efficient technologies, flood control, and site drainage, insulation against heat, and many other products and services.

The PROADAPT program was launched in 2013 by the Inter-American Development Bank (IDB), in partnership with the Nordic Development Fund (NDF), to support climate resilience in SMEs and their supply chains, and to foster business and investment opportunities in private resilience solutions. In addition, PROADAPT supports thought leaders and innovators in the development and dissemination of practical tools that highlight opportunities for business and investment in climate resilience. For PROADAPT and IDB, the need to support financial institutions in their efforts to address climate risk is directly linked to supporting climate resilience in smaller firms and their supply chains.

Recently, Price Waterhouse and Coopers (PwC) Brazil, together with the University of California, San Diego, were hired through the PROADAPT program to develop a financial tool that analyzes the credit behavior of agribusiness clients in the semi-arid region of Bahia, Brazil. The study incorporates the effects of climate change as a brand-new variable to the traditional credit scoring model used by financial institutions. By including such a tool, the banks will be able to understand their clients’ risks better and then be able to incorporate them in their credit scores. Not only banks could benefit from such a tool but also small farmers, who seek different methods to ensure their crops to succeed, such as by using resilience tools like for example artesian wells and climate resilient seeds. This type of analysis allows investors to allocate resources more effectively to small farmers and to help develop the awareness and the market for climate resilient tools and technologies. Moreover, based on these analyses, banks will be able to work with differentiated interest rates for each rural borrower, according to the risk of each of these small farmers.

The results of the study show that the climate variable is an important factor to be considered by financial Institutions in their credit risk analysis. A credit scoring model that considers a climate variable allows the financial institution to predict a more accurate probability of default, based on each crop and their responses to extreme weather events. This means that, if banks start considering this variable in their analysis, it will be possible to reduce their own risks, increase the demand for climate resilience tools and thus resulting in less vulnerable clients and better outcomes for the banks.

The other objective of the study was to analyze the impact of the use of resilience tools on the payment capability of small farmers. When shocks like heat, drought or flooding occur, borrowers in the study were more likely to default, but this effect is diminished when the farmers use various types of water storage technologies. The conclusion is that investments in water storage technology help to climate-proof the productive continuity and thus the credit score of that farmer. The implication of this is that financial institutions should consider concessional loans to farmers willing to install such equipment since their risk of default would be reduced as a result. More importantly, considering that the frequency and severity of such shocks are about to increase, these investments could play an increasingly important role in protecting the financial market in agriculture from climate-driven default.

The conclusion of these findings is that climate change should be a significant component in credit scoring models for small farmers in climate-sensitive regions. Furthermore, the demand for products such as IDB Invest’s Green Lines of Credit will probably increase as will the interest to work with financial institutions to invest in climate resilience tools and to identify climate business opportunities.

If you want to know more about how climate change and credit for small farmers are related, please join our event “Climate risk and access to finance: Could increased climate resilience mean lower default rates among small businesses in agriculture?” on October 4th, 2018 at 12 p.m.


Filed Under: Agriculture and Food Security, Climate change

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Primary Sidebar

Follow Us

Subscribe

SEARCH

Sustainability

This blog is a space to reflect about the challenges, opportunities and the progress made by Latin American and Caribbean countries on the path towards the region’s sustainable development.

SIMILAR POSTS

  • Four myths about climate risk and financial systems in Latin America
  • Central banks and financial supervisors are starting to think big on climate change
  • Jamaica Nuff Problem mon!
  • The Business Case for Climate Resilience
  • Climate change is one of the world’s greatest risks

Footer

Banco Interamericano de Desarrollo
facebook
twitter
youtube
youtube
youtube

    Blog posts written by Bank employees:

    Copyright © Inter-American Development Bank ("IDB"). This work is licensed under a Creative Commons IGO 3.0 Attribution-NonCommercial-NoDerivatives. (CC-IGO 3.0 BY-NC-ND) license and may be reproduced with attribution to the IDB and for any non-commercial purpose. No derivative work is allowed. Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB's name for any purpose other than for attribution, and the use of IDB's logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC- IGO license. Note that link provided above includes additional terms and conditions of the license.


    For blogs written by external parties:

    For questions concerning copyright for authors that are not IADB employees please complete the contact form for this blog.

    The opinions expressed in this blog are those of the authors and do not necessarily reflect the views of the IDB, its Board of Directors, or the countries they represent.

    Attribution: in addition to giving attribution to the respective author and copyright owner, as appropriate, we would appreciate if you could include a link that remits back the IDB Blogs website.



    Privacy Policy

    Derechos de autor © 2025 · Magazine Pro en Genesis Framework · WordPress · Log in

    Banco Interamericano de Desarrollo

    Aviso Legal

    Las opiniones expresadas en estos blogs son las de los autores y no necesariamente reflejan las opiniones del Banco Interamericano de Desarrollo, sus directivas, la Asamblea de Gobernadores o sus países miembros.

    facebook
    twitter
    youtube
    This site uses cookies to optimize functionality and give you the best possible experience. If you continue to navigate this website beyond this page, cookies will be placed on your browser.
    To learn more about cookies, click here
    x
    Manage consent

    Privacy Overview

    This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
    Necessary
    Always Enabled
    Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.
    Non-necessary
    Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. It is mandatory to procure user consent prior to running these cookies on your website.
    SAVE & ACCEPT