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Climate Risk for Development

Climate change, and society’s response to it, present financial risks and opportunities to financial institutions and corporates. These risks, or opportunities, can stem from two primary channels:

  • Physical risks arise from the physical effects of increasingly severe and frequent climate and weather-related extreme events such as droughts, floods or hurricanes, 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 property and other infrastructures, 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.
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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.

Task Force on Climate-related Financial Disclosures (TCFD)

Implementation of the TCFD’s recommendations.

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.


IDB Group’s climate risk-related support activities

 

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


Climate-related risks and opportunities


Climate-related risks and opportunities

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Managing climate risk allows overcoming barriers such as:

  • Financial instability due to climate change
  • Reduced asset values and companies’ profitability due o 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


 
Resources
  • Stay updated on the latest trends of Green Finance

Third TCFD Status Report Shows Progress & Highlights Need for Greater Climate-Related Disclosures and Transparency

The TCFD also issues implementation guidance and opens public consultation period to solicit input on forward-looking metrics The Task Force on Climate-related Financial Disclosures (TCFD), established by the Financial Stability Board (FSB), published its 2020 Status Report today. Reviewing 1,700 companies’ reports using artificial intelligence technology, the Task Force found that disclosure of climate-related financial information aligned with the TCFD recommendations has steadily increased since the recommendations were published in 2017. The largest increases relate to companies disclosing how they identify, assess, and manage climate-related risk. Industries considered most exposed to material climate risk have led with the highest levels of TCFD disclosure. To date, more than 1,500 organizations have expressed their support for the TCFD recommendations, representing an increase of over 85% since the 2019 status report. However, despite the significant momentum, the 2020 Status Report highlights the continuing need for progress in improving levels of TCFD-aligned disclosures given the urgent demand for consistency and comparability in reporting. In particular, disclosure of the potential financial impact of climate change on companies’ businesses and strategies remains low. Key findings from the Task Force’s review of company disclosures, insights from users, and other research include: • Energy companies and materials and buildings companies are leading on disclosure, with an average level of TCFD-aligned disclosures of 40% for energy companies and 30% for materials and buildings companies in fiscal year 2019. • Expert users of disclosure identified the impact of climate change on a company’s business and strategy as the “most useful” information for financial decision-making. • Asset manager and asset owner reporting to their clients and beneficiaries is likely insufficient. • The report also provides an illustrative ‘roadmap’ for preparers by highlighting insights from expert users on which information is most useful for decision making To support companies’ implementation efforts, the Task Force is issuing two guidance documents with the release of this status report: • Guidance on conducting climate-related scenario analysis; and • Guidance on integrating climate-related risks into existing risk management processes and disclosing those processes. The Task Force also seeks feedback on its consultation on decision-useful, forward-looking metrics for the financial sector. Publication of the consultation document today begins a 90-day public consultation period, ending January 27, 2021. The Task Force will deliver its next status report to the FSB in September 2021. DOWNLOAD REPORT HERE




 

Visit other Initiatives

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  • Bioeconomy
  • Private Sector
  • Green Social and Thematic Bonds
  • Green Finance
  • Climate Risk
  • Blue Economy
  • Green Bond Transparency Platform
  • LAB

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