Role Of The Financial Services Sector

Climate change has become an important factor for the financial sector in its banking, insurance, and investment activities. Challenges for the sector will appear from the different directions that have been identified earlier in this chapter: regulations that are designed to limit GHG emissions, physical changes that take place due to climate change impacts, legal challenges to be brought on by inadequate governance, reputational fallout for companies due to corporate positions on climate change, and competitive pressures in the marketplace as production costs shift and products are substituted in response to the new reality of a carbon-constrained world. Indeed, reports have been published warning of the potential exposures in all segments of the sector (see, for example, ACF 2006; Lloyd's 2006).

Companies in the financial services sector have a dual responsibility: the first is to prepare themselves for the negative effects that climate change may have on both their clients and their own business. The second role of the financial sector is to provide products and services that will help mitigate the economic risks of a carbon-constrained society. Roles and levels of responsibility that exist within different groups of the financial services sector include:

■ Trustees of institutional investors investigating the linkages between climate change and their fiduciary duty.

■ Institutional investors actively engaging actively within the climate policy process.

TABLE 1.3 Risks and Opportunities of Climate Change within the Financial Services Sector

Class of Business

Risks

Opportunities

Banking

Retail banking

Corporate banking and project financing

Insurance

Property, casualty, life, underwritings

Investments

Investment banking and asset management

Direct losses due to physical risks: e.g., precipitation, drought, Policy changes, e.g., termination of subsidies for renewable energy In creased credit risks by affected clients Higher energy costs for consumers Price volatility in carbon markets Reputational risk due to investments in controversial energy projects

Losses from: Weather and extreme events Business disruption coverage Impacts on human health

Investments in immature technologies Additional costs due to change in weather patterns, e.g., in the utilities sector Loss of property assets

Offering new climate mitigation products Microfinance for climate-friendly activities Advisory service for small renewable energy project loans

Clean-tech investments

More demand for alternative risk transfer New insurance products Counterparty credit for carbon trading Carbon neutral insurance coverage Carbon-delivery guarantee for CDMs Insurance for emissions trading Carbon as an insurable asset

Investing in climate change-related products Offering weather derivatives Establish Carbon Funds Trading Services in the EU ETS

Green technology

Source: Derived from Allianz AG and WWF International. 2005. Climate Change & the Financial Sector: An Agenda for Action. Gland: Allianz AG Munich and WWF International.

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