Presentation by Alan Miller and Andrew Eil, Climate Finance Advisors, as part of the Peer Learning Summit (PLS) in Rotterdam, Netherlands, from July 9-11.
Driving Finance Today for the Climate Resilient Society of Tomorrow
1. Financial institutions’ role in integrating physical
climate risk into the financial system and in mobilizing
investment in climate adaptation and resilience
NAP Global Partnership Peer Learning Summit
Master Class
Rotterdam, The Netherlands
July 11, 2019
Alan Miller, Andrew Eil
Climate Finance Advisors, Benefit LLC
2. WHAT IS CLIMATE RISK IN THE FINANCIAL SYSTEM?
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4. ECONOMIC IMPACTS OF CLIMATE CHANGE - PROJECTED
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Global damages up to
US$20 trillion by 2100
1.5°C
2°C• Studies estimate that for
every 1°C of warming, GDP
growth falls by 1.2%
• 15%–25% reductions in per
capita output by 2100 for
warming above 2°C
5. BARRIER TYPES
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2
3
4
5
Inadequate Support for Adaptation,
Resilient Investment
Policy and Practice in the
Financial Industry
Market Barriers
Nascent Application of Climate Risk
Management Practices
Low Capacity for Climate Risk Management
6. CLIMATE RISK: SOME THINGS TO CONSIDER
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What Happens with a Better Understanding of Risk?
Capital Shifts
and/or Flight(?)
Tilting/Shift
towards climate-
resilient assets
New business
models and
opportunities
Policy Makers
Financial
Actors
Opportunities Risks
7. EXAMPLES OF INNOVATIVE APPROACHES TO ADAPTATION
FINANCING
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Identify and
disclose risks
Create
conducive
enabling
environment
Promote public
and private
actions to
reduce risks and
enhance
resilience
Evaluate in
financial
terms
CRITICAL NEED FOR BETTER AND CONSISTENT METHODS TO
8. HIGH-LEVEL RESPONSES FROM POLICYMAKERS
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HELSINKI PRINCIPLES
• Launched in December 2017
• Global forum bringing together
central banks and supervisors
• 36 members participating
• Three different work streams:
• Supervision
• Macro-financial
• Mainstreaming green finance.
• Launched in April 2019
• Global forum bringing together
finance ministers from around the
world
• Over 20 members
• Aims to drive stronger collective
action on climate change
9. ROLE FOR FINANCIAL REGULATORS AND PUBLIC AND
PRIVATE INSTITUTIONS
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Metrics and Standards
Disclosure and
Reporting
Framework for Assessing
Physical Climate Change Risk
(May 2019)
Enhancing Banks’ and Insurers’
Approaches to Managing the
Financial Risks from Climate
Change (April 2019)
Technical Expert Group on
Sustainable Finance Report
on Climate Related
Disclosures (January 2019)
TCFD Implementation
Guide (April 2019)
Technical Expert Group
on Sustainable Finance
(TEG)
10. RESPONSE BY THE PUBLIC SECTOR AND
GOVERNANCE BODIES
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Financial System
Governance Bodies
Policy-Makers
Rule-makers and
standards bodies
Oversight and
supervisory authorities
PRUDENTIAL
• Risk management
• Risk mitigation
DISCLOSURE AND REPORTING
• Accurate, transparent information for investors
• Measuring, monitoring
STANDARD SETTING
• Standards for products and markets
• Metrics and definitions
FISCAL AND MONETARY POLICY
• Setting interest rates
• Bank regulation
11. RISK TRANSFER AND REDUCTION SOLUTIONS
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Social impact and green bonds
Risk transfer products (e.g. index insurance)
Blended finance (e.g. concessional lending)
Prizes and competitions
12. MDBS ARE INCREASING COMMITMENTS
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Boost adaptation
financing
Drive a mainstreamed
programmatic approach
Develop a system to
create incentives and
track progress
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2
3
ACTION PLAN ON CLIMATE
CHANGE ADAPTATION AND
RESILIENCE
13. OPPORTUNITIES TO PROMOTE BUSINESSES AND INVESTMENT
OFFERING ADAPTATION AND RESILIENCE SOLUTIONS
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Pilot Program for
Climate Resilience:
Nepal Hydropower
Project
District of Columbia:
Water Environmental
Impact Bond
US$23 trillion investment opportunity to achieve the Paris Agreement
goals by 2030 – just in 21 large emerging market economies
Climate risk data and
analytics
Insurance products
and investment
vehicles
14. NATIONAL ADAPTATION PLANS – FOUR ELEMENTS
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•Focusing more
concretely on who
will do what, and
how
•Setting up systems to
track the effectiveness of
the NAPs
•Analytic activities to
fill information gaps
identified
•Taking stock of needs,
opportunities, entry
points, and key
resources
A. Laying the
groundwork and
addressing gaps
B. Preparatory
Elements
C. Implementation
Strategy
D. Reporting,
Monitoring, and
Review
15. NATIONAL ADAPTATION PLANS AND THEIR
CONTRIBUTIONS
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Private
Financiers
Private
Enterprises
Government
Implementation
of NAP
FINANCING
IMPELMENTERS
FINANCING
FINANCING
ENABLING FACTORS
ENABLINGFACTORS
Private Financiers
• Provide financing to private
enterprises
Private Enterprises
• Supply climate adaptation
services and products
Government
• Development, implement,
and monitor NAP priorities
Adapted from “Engaging the Private Sector in National
Adaptation Planning Processes,” NAP Global Network, April 2019
16. • Should estimate the total cost of
actions in the NAP process
• Should establish existing sources of
finance (public, private, and
international) as well as fiscal tools
and financial instruments to meet
these costs
• Blending streams of finance
• Establish roles for public and private
sectors
EXAMPLE NAP COUNTRY PLANS
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FIJI
• Use of systematic climate
screening tools in the public and
private sector
• Integration of climate change and
adaptation responses into
environmental impact assessmetns
• Raise awareness amongst private
sector stakeholders
• Identify further areas of
collaboration
GRENADA
17. NAP CASE STUDIES
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ATOTONILCO
WASTEWATER
TREATMENT
PLANT, MEXICO
In 2017, developed a new initiative
to provide preferential interest rates
on loans for farmers who buy climate-
resilient seeds and/or irrigation kits
In 2009, partnered with the Mexican
government and the private sector to
establish the world’s largest wastewater
treatment plant
Editor's Notes
Sources:
Burke, Marshall, et al. “Large Potential Reduction in Economic Damages under UN Mitigation Targets.” Nature, 2018.
Hsiang, Solomon, et al. “Estimating Economic Damage from Climate Change in the United States.” Science, 2017
Critical need for understanding/internalizing physical climate risk into financial decision-making
Real challenges of capital flight
Socially valuable -- and profitable investment opportunities
Unclear ownership of physical climate risk -- expectations of government backstop
Managing risk and uncertainty fundamental to finance – but tools and methodologies needed
In this sense, every Financial Actor “owns” climate risk directly, and also in many cases indirectly. Yet few are proactively addressing these risks, even for their own investments
Notwithstanding the potential for direct losses, the absence of any Financial Actor taking ownership of climate risk they are directly (or indirectly) exposed to reinforces the perception and implicit assumption that the back-stop for these risks are governments and the public balance sheet
It is in the interests of both Financial System Governance Bodies and Financial Actors to address climate risks collectively
yet there is nothing currently in the financial system which explicitly incentivizes good climate risk management, either by fully pricing-in climate risks, information disclosure or policy directives that support investment in resilience/resilient investments
Helsinki Principles:
Align policies with Paris commitments
Share experience and expertise
Work towards carbon pricing
Account for climate change in macroeconomic policy, fiscal planning, public investment, etc.
Mobilize private sources of funding
Engage in the preparation and implementation of NDCs
The Commission set up a technical expert group on sustainable finance (TEG) to assist it notably in the development of a unified classification system for sustainable economic activities, an EU green bond standard, methodologies for low-carbon indices, and metrics for climate-related disclosure.
The TEG began work in July 2018 and will operate until June 2019, with a possible extension until end-2019. Its 35 members from civil society, academia, business and the finance sector, as well as additional members and observers from EU and international public bodies work both through formal plenaries and sub group meetings for each work stream. To ensure transparency, the Commission will organise outreaches in 2018 and 2019. Read the outreach plans for each subgroup here. They will be updated on a regular basis.
Combine slides 5 and 6: Financial system governance bodies, concept that frames the paper
Of the actions and initiatives to date to address climate risk, far more effort has been made around issues related to metrics and standards, as well as disclosure, as well as efforts to address or invest in mitigation efforts
more needs to be done to employ risk management approaches for physical climate risks
assessing physical climate risks can be complicated. Physical climate risks [typically] have three characteristics which make the assessment of climate risk challenging, including
They are linked to specific hazards – or a combination of hazards – which are present at the physical location of an asset, project, its operations or supply chain
The various financial impacts of “hazards” that a project may encounter related to a changing climate depends on the circumstance of the IsDB client, including its own financial health, its ability to withstand financial impacts from business interruption and other factors
Anticipating the timeframe that physical climate risks may become material is a function of evolving probabilities that those impacts will occur
Adapted from “Engaging the Private Sector in National Adaptation Planning Processes,” NAP Global Network, April 2019
https://www.iisd.org/reader/napgn-en-2019-engaging-the-private-sector-in-national-adaptation-planning-processes
