Climate Risk and Financial Institutions

Abstract

How significant are the impacts of man-made climate change today? The summer 2003 European heat wave had disastrous consequences: water shortages shut down 14 nuclear plants at electricity producer EDF, causing electricity price spikes of 1,300 percent, which, because they could not be passed on to customers, resulted in a $300 million loss; European agriculture lost an estimated $15 billion; and more than 35,000 people died. The ripple effects dramatically affected upstream and downstream sectors of various regions. France, the largest energy exporter in Europe, cut its energy exports by more than 50 percent. Output of animal fodder fell by up to 60 percent, and despite imports from countries not affected by the heat wave, such as Ukraine, livestock producers were affected by shortages and price hikes. Without man-made climate change, a summer as hot as 2003 would have been an exceptional "1-in-1,000-year" event. Due to man's influence on the climate, by 2003 the risk of such an event had already more than doubled to 1 in 500 years. By 2040 summers as hot as 2003 will be "normal," 1-in-2-year events, and by 2060 they will be cooler than the average (COPA/COGECA 2004; Stott et al. 2004; UNEP 2004).

Enabling Environment for Private Sector Adaptation

“…China's US$4.2 billion railway line connecting Lhasa, Tibet, and Quinghai, China, was built on 'warm permafrost' (commonly defined as permafrost warmer than -1.5°C) thanks to engineering cooling techniques which added 1% to total capital costs, however if increases in average annual temperature of 2 to 3°C by 2050 are realized in the region, costly retrofits will be needed to ensure the continued safe operation of the railway; 66 Research in UK estimated that a section of the main railway line between London and Cornwall will suffer from increased sea wave 'overtopping', as well as more frequent speed restrictions and line closures because of sea level rise and increased coastal flood risk, adding to the already high annual maintenance costs of US$793,000 borne by the railway operator network Rail; 67 and A study by University of Alaska Anchorage showed that without adaptation, the costs of climate change for public infrastructure in Alaska (such as roads, airports, bridges, railroads, harbors, water and sewer systems, buildings and telecommunications assets) could be in the range of US$3.6 to 7 billion between 2006 and 2030, adding 11 to 22% to ordinary wear and tear costs. 68 Without codes and standards prescribing engineers and architects to follow building and infrastructure design and construction practices that are resilient to climate change impacts, developers and owners have little incentive to bear the additional upfront costs to adapt, given the uncertain (and sometimes long-term) payback.…”

“…122 Furthermore, some financial institutions, such as the IFC and Barclays, have started integrating climate change risk considerations into their investment diligence processes. 123 As these practices develop further and become more common in the future, those who are taking proactive steps to improve their climate change resilience could be rewarded with preferential financing terms.…”