(UN Environment Programme, Finance Initiative) This week the Intergovernmental Panel on Climate Change (IPCC) launched the second part of its 6th Assessment Report, drawing on seven years of research from peer-reviewed scientists. The report provides an alarming summary of the increasingly devastating impacts of climate change on societies and economies, their vulnerabilities and how we may adapt to inevitable climate change. UNEP FI’s Paul Smith provides a summary of the key implications for financial institutions…
Private finance therefore must play a role and despite the challenges of financing adaptation, there are green shoots, some of which are highlighted in the extended report (IPCC 2022). Estimating risks from physical climate impacts is an important starting point and a handful of open data providers are pulling together the forward-looking information necessary to estimate risks, such as OS-Climate, ESG Books, while certain central banks are supporting scenario analysis and climate stress testing to better estimate financial risks from climate impacts. Going one step further, financial institutions need better methodologies to integrate these risks into asset valuations. Green, sustainable and resilience bonds are vehicles whose proceeds can be used to finance activities with positive climate adaptation goals, based on qualitative guidelines such as the Climate Bond Initiative’s Climate Resilience Principles, which forms the basis for the European Bank for Reconstruction and Development’s 2019 Climate Resilience Bond. A qualitative methodology has been developed by the Coalition for Climate Resilient Investment (CCRI) to price future physical climate risks into major investments – initially focusing on large-scale infrastructure. Where this approach goes further is in estimating the costs of adapting those projects, including consideration of nature-based adaptation solutions, and effectively building a business case for investing in adaptation.
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