This paper analyzes the approaches adopted by institutional investors to manage climate risk in their portfolios and proposes policies to increase climate awareness in this large segment of the capital markets. Because of their size and their role as conduit of savers' climate concerns to the capital markets, most non-bank financial institutions are ideally positioned to steer corporate capital allocation toward more sustainable uses. Over the past decades, an increasing number of institutional investors have adopted strategies to mitigate climate exposure. These include negative screening, positive screening, active ownership, sustainability ratings, and hedging of climate risks. These strategies reflect specific fund manager mandates and the recognition that climate risks can have a tangible impact on financial assets' valuations and, as a result, institutional fund performance. We review the evidence about the adoption of these strategies, in both advanced and developing capital markets. We then analyze the pros and cons of each strategy in promoting more sustainable climate practices and identify best practices. We conclude with policy recommendations for capital markets regulators to incentivize the adoption of sustainable practices among institutional investors.

This paper analyzes the approaches adopted by institutional investors to manage climate risk in their portfolios and proposes policies to increase climate awareness in this large segment of the capital markets. Because of their size and their role as conduit of savers' climate concerns to the capital markets, most non-bank financial institutions are ideally positioned to steer corporate capital allocation toward more sustainable uses. Over the past decades, an increasing number of institutional investors have adopted strategies to mitigate climate exposure. These include negative screening, positive screening, active ownership, sustainability ratings, and hedging of climate risks. These strategies reflect specific fund manager mandates and the recognition that climate risks can have a tangible impact on financial assets' valuations and, as a result, institutional fund performance. We review the evidence about the adoption of these strategies, in both advanced and developing capital markets. We then analyze the pros and cons of each strategy in promoting more sustainable climate practices and identify best practices. We conclude with policy recommendations for capital markets regulators to incentivize the adoption of sustainable practices among institutional investors.

Some rights reserved 1 2 3 4 25 24 23 22 Books in this series are published to communicate the results of World Bank research, analysis, and operational experience with the least possible delay. The extent of language editing varies from book to book. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.Nothing herein shall constitute or be construed or considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved.

How is this report structured?This report is organized in six chapters as follows:Chapter 1. Climate and Natural Hazards Resilience. This chapter contains a brief overview of climate and natural hazards disasters and risk, as well as a definition of adaptation and resilience. After reviewing existing literature on funding needs and funding gaps, this chapter briefly discusses the most notable global trend in private sector adaptation finance.Chapter 2. Resilience Market Segmentation. This chapter contains a high-level analysis of the resilience impact and potential for commercial investment in four economic sectors -water, agriculture, transport, and energy, covering both infrastructure and value chains.Chapter 3. Agriculture Resilience In-Depth Analysis. This chapter discusses the resilience relevance of the agriculture sector, and further analyses potential and investment barriers associated with resilience investment in agricultural infrastructure, and along the main link of the agriculture value chain.Chapter 4 -Resilience investors landscape and investment tools. This chapter provides an overview of agri-resilience investors, focusing on private sector finance. It also contains an analysis of financing tools that are usually associated with climate finance, and adaptation finance.Chapter 5. Resilient agricultural infrastructure: the irrigation PPP facilitation program. After reviewing the rational for investing in irrigation infrastructure, this chapter analyzes the current investors' landscape, identifies issues that affect private sector participation, and proposes an integrate lifecycle financing approach.Chapter 6 -Resilient value chains: early stage and PE/VC in agri-resilience. This chapter focuses on agriculture resilience in Asia, through the review of market structure, institutional environment, climate impact, and investors' landscape, and potential investment themes in three pilot countries -China, Myanmar, and Vietnam. A hybrid capital fund is suggested as efficient and scalable way to attract private sector funding to agri-resilience. Why blended finance could increase private sector funding to adaptation in the agriculture sector?Many adaptation projects in the agriculture sector have some form of viability gaps. Many agriculture resilience projects that could be commercial end up not being financed for a variety of reasons, including: i) the true value of an adaptation investment is often not captured by financial markets, particularly when part of the benefit of the investment accrue to interest groups beyond the investor (positive externalities or investment co-benefits). For example, investing in precision agriculture generates co-benefits like food security, rural development, and climate mitigation but agricultural producers and their financiers are not reworded for this service; ii) shareholders and financial markets often value short term gains, which means that there is a shortage of financing for investments that are required to cope with long-term or distant climate impacts. iii) the...

Some rights reserved 1 2 3 4 25 24 23 22 Books in this series are published to communicate the results of World Bank research, analysis, and operational experience with the least possible delay. The extent of language editing varies from book to book.This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.Nothing herein shall constitute or be construed or considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved.