Climate risk and financial institutions : challenges and opportunities

This report analyzes in some detail the risks to project finance and the performance of real-sector investments. Options, futures, derivatives, foreign exchange and more exotic instruments are not specifically addressed. The objectives of institutional investors, such as pension funds, include creation of sustained revenues over a long period of time. Clearly, given this long-term perspective, institutional investors need to be particularly aware of growing risks to their investments in climatically sensitive sectors or regions. This report demonstrates that climate change and its impacts are likely to alter a number of conditions that are material to the objectives of financial institutions. If changing conditions are not actively managed, investments and institutions may underperform. Most investments will be channeled through financial institutions. Given that the main effects of climate change are now well established, there is a considerable opportunity, as well as a responsibility, for these institutions to take a leading role in adaptation to climate change. Institutions managing investments in long-lived assets have both a direct financial risk to consider and the opportunity to create value by working proactively with their clients and other stakeholders to take steps to manage the risks. Going forward, International Finance Corporation (IFC) will initiate the development of more general tools addressing climate risks and investments.