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Workshop

Climate Risks: Approaches, Tools and Methodologies

The Work Stream 1 of the Initiative “Climate Risks: Approaches, Tools and Methodologies” aims to facilitate knowledge sharing between Supporting Institutions on climate-related risk management. As part of the initial phase of the work stream, the co-leads Inter-American Development Bank (IDB) and the Agence Française de Développement (AFD) convened supporting institutions and actors working on this issue for an expert workshop on the 13th of February 2018.

OPENING REMARKS: AMAL-LEE AMIN, CHIEF OF CLIMATE CHANGE DIVISION (IDB)

Amal-Lee Amin welcomed participations as host of the workshop and co-leader of the Work Stream 1 and summarized the outcomes of the internal working session organized on the 12th of February.

KEYNOTE ADDRESS: JUAN PABLO BONILLA, MANAGER OF THE CLIMATE CHANGE AND SUSTAINABLE DEVELOPMENT SECTOR (IDB)

Juan Pablo Bonilla began his keynote address with this question: What are the next steps to mainstream climate change?

For the IDB, Juan Pablo Bonilla underlined three aspects:

  • Upstreaming climate risk at strategic & sectoral level, creating awareness in governments, especially Finance Ministers, about the importance of climate risks;
  • Having a territorial approach, especially to work with cities;
  • Working on the preparation to climate risks, especially on the insurance by reviewing how primes are calculated .

He emphasized that the Sustainable Development Goals have required more transversal action in IDB operations and that learning from other institutions through the Initiative is both useful and important.

On the 2nd of May, the IDB will organize an event to share knowledge with actors from their region of intervention on climate risks.

Juan Pablo Bonilla concluded his address with the advice for financial institutions to: “Keep in mind that we need to be creative”.

Panel 1: Supporting Institution’s Perspective of Identifying and Managing Climate Risk

In this panel, speakers commented how and why their respective institutions integrate climate risk assessment (both transition risks and physical risks) and analysis into investment pipeline screening and existing portfolios.

  • Moderator – Ian Cochran, Program Manager – I4CE
  • Panelist 1: Davinah Milenge Uwella, Senior Environment and Climate Change Officer – AfDB
  • Panelist 2: Marcamen Esquivel, Climate change specialist – IDB
  • Panelist 3: Monica Scatasta, Head of Environment, Climate and Social Policy – EIB
  • Panelist 4: Craig Davies, Head of Climate Resilience – EBRD
  • Panelist 5: Laurent Bergadaa, Research officer – AFD
  • Panelist 6: Ryan Barlett, Lead for climate risk management – WWF USA

Davinah Milenge Uwella (AfDB) started by highlighting that when disasters hit or climate-related impacts occured, stranded assets could be found in all sectors. “We now have stranded assets in tourism, mining, other sectors” because of the drought. She emphasized that one of the key challenges was to cover the incremental costs that managing these risks better might incur. To her, political awareness and advocacy constitute major areas of work for Development Banks.

Marcamen Esquivel (IDB) highlighted the need to embed climate change in the full disaster risk management policy from vulnerability-based screening, to contingency plans and risk instruments. She has perceived a strong demand by clients for climate risks assessment, but also identified a key challenge: how to do this in an efficient and affordable way particularly when information on hazards is limited? What is needed remains a key question and her last advice was “don’t jump to fast”.

Monica Scatasta (EIB) insisted on the why and when addressing risks. As lending for adaptation needs to increase, the question why needs to be considered in terms of both risks and opportunities. Then, she insisted on the need to assess risks and opportunities at different stages of the project cycle, and thus to develop awareness and capacity building of both project developers and credit risks colleagues.

Craig Davies (EBRD) noted good progress on risk assessment, but highlighted that if we want to mainstream climate risk assessment in the financial community, metrics are required. He presented a pilot exercise currently lead by EBRD aiming to define the climate resilience benefit of adaptation projects as part of the MDB Working Group. The EBRD will organize an event on this pilot exercise, May 21 in London focusing on engaging their private sector clients on this topic.

Laurent Bergadaa (AFD) noted that transition risks are as important and complex to assess as physical risks. From his perspective, investing in climate friendly projects and actions is the foremost way to hedge against climate financial risks and he noted that the AFD also systematically measures the projects carbon footprint in addition to its developed climate vulnerability assessment tool. In addition, the AFD is currently conducting four areas of work:

  • Development of a tool with Carbon 4 to assess physical risk in portfolio (CRIS project)
  • Conduct of in depth national case studies to understand this from sovereign risk perspective
  • Development of tools for portfolio assessment of both physical and transition risks
  • Macro-modelling approach looking at physical risks at a national level (GEMMES model – GEneral Monetary Macro-dynamics for the Ecological Shift))

Ryan Barlett (WWF) presented how his institution sees this issue – and more broadly ecosystem services – and above all the urgency of action needed. He noted that the 2018 report of the World Economic Forum placed climate change as one of the most significant risks that the world faces. While he praised the steps taken by a number of financial institutions to address these risks, he nevertheless recalled the fact that there is an enormous amount of projects that are not compatible with the a 2°C scenario – and vulnerable to the future climate that appears to be locked in.

One of the key conclusions of the first panel was that dialogue and exchanges between institutions are necessary to move forward in this “wild west”. It was noted that development banks have in many instances taken the first steps forward given their mandates. While convergence and sharing of practice is needed, it was noted that one-size fits all approaches may not be possible. Finally, it is important to ensure that the way that the way these risks are managed will not prevent the most vulnerable actors from accessing finance.

Panel 2: Innovating with Clients: Helping Clients Manage their Climate Risk(s)

Banks, financial institutions and financial service providers can all play a pivotal role in ensuring that investments are developed and built integrating climate considerations, including both transition and physical climate risks. Particularly, emerging innovation in products, tools and services can help clients better identify, assess and manage climate risk. In this session, panelists discussed current approaches they use to help clients overcome risks and barriers to low-carbon and resilient investment.

  • Moderator: Amal-Lee Amin, Chief of Climate Change Division – IDB
  • Panelist 1: Lisa Dickson, Associate Principle – Arup
  • Panelist 2: Josh Sawislak, Lead of Global Resilience and Climate Adaptation Strategy – AECOM
  • Panelist 3: Kruskaia Sierra-Escalante – Manager Blended Finance Unit
  • Panelist 4: Francis Ghesquire, Head of Global Facility for Disaster Reduction and Recovery – World Bank Group
  • Panelist 5: Jay Koh, Managing Director – Lightsmith Group
  • Panelist 6: Maya Hennerkes, Lead officer – IDBinvest

Lisa Dickson highlighted that resilience is currently undervalued by clients because risks are under reported. There is a need to change how we capture the value of funding and to work on performance metrics.

Josh Sawislak noted the clients interest and demand for climate risk management and the improvement of information now offered by some service providers in terms of climate risks.

Kruskaia Sierra-Escalante highlighted the need for technical assistance and existing blended finance tools to drive private finance. She presented the example of a training course conducted for SME funds in Oxford, where participants were asked to analyze additional climate-related risks of existing pipelines of projects.

Francis Ghesquire noted that most of the World Bank’s progress on climate risk over the years has been on translating the language of climate risks for clients and highlighted the need to integrate the concept of uncertainty in cost benefit analysis. He also called for common leadership of Ministries of Finance on climate risks.

Jay Koh presented the Climate Resilience and Adaptation Finance & Technology Transfer Facility (CRAFT), a growth equity fund aiming to finance and support companies with proven technologies and solutions for climate resilience and have demonstrated market demand. Through a blended finance structure, the objective of the facility is to crowd in private capital.

Maya Hennerkes focused on the need to assess climate risks very early in the project development, presenting the challenges in helping clients managing climate risks once they are identified and occur.

Panel 3: Climate Risk Impacts to the Financial System – From Regulations, Disclosure and Climate Risk Assessment – 1:30 – 3:00

Climate-related risks and macroeconomic impacts may have financial implications to central banks, investors and various financial actors within the financial system. Panelist in this session shared experiences from their respective institutions on understanding and managing macroeconomic climate risks and discussed overall barriers to supporting capacity building and implementation and how best to find common solutions in overcoming them.

  • Moderator: Enrique Nieto, Financial Markets Lead Specialist – IDB
  • Panelist 1: Courtney Lowrance, Global Head, Environmental and Social Risk Management – Citi
  • Panelist 2: Alexis Bonnel, Development-Environment advisor, Operations Department – AFD
  • Panelist 3: Stéphane Hallegatte, Lead Economist, Global Facility for Disaster Reduction and Recovery – World Bank
  • Panelist 4: Nicole Martin, Senior Director Sustainable finance, S&P
  • Panelist 5: Rodrigo Pereira Porto, Head of Division, Financial System Regulation Department – Central Bank of Brazil

Courtney Lowrance highlighted the important contribution of the Task Force on Climate-related Finance Disclosure in making climate risks assessment a new priority in the financial community, but also highlighted the need to further work with credit risk managers and risk teams.

Alexis Bonnel emphasized that beyond risk assessment the key question is: how uncertainty is integrated in decision-making processes? He warned that tools can be too predictive and let the illusion of control, while managing risks also includes guidance on the decision to take once a risk is identified.

Stéphane Hallegate highlighted that under uncertainty people focus on preparing stress tests and different scenarios while the key question is “how to select the right scenario?”. Through a screening / scanning of physical risks for all projects, the objective of the World Bank is to have all projects developers identify and prioritize the threats of the project. This process will probably not resume a complex process into only one indicator.

Nicole Martin agreed that creating a quantified one-size fits all indicator was not possible. To her, there is not a single scenario and each institution needs to develop its own scenario but it then brings the question of the robustness of the scenarios.

Rodrigo Pereira Porto explained that the Central Bank of Brazil is responsible to ensure both price stability and the stability of the financial sector. As such, central banks need to analyse how climate change does affect these two missions.

Panel 4: Lessons from the Field and the Front Line 3:15 – 4:45

As financial institutions and actors across the financial ecosystem become increasingly aware of the importance of managing climate risks, the first panelists noted an increasing demand in tools and services to help quantify and translates climate risks into useful financial decisions.

This panel featured climate-related service providers that help clients identify, assess and quantify climate-related financial risks.

  • Moderator: Chiara Trabacchi, Climate Finance specialist – IDB Invest
  • Panelist 1: Emilie Mazzacurati, Founder and CEO – Four-Twenty-Seven Climate Solutions
  • Panelist 2: Daniele Cesano, Managing Partner – Adapta Group
  • Panelist 3: James McMahon, CEO – The Climate Service
  • Panelist 4: John Firth, CEO and co-founder – Acclimatise
  • Panelist 5: Jerri Ribeiro, Partner, Risk and Compliance – PriceWaterhouseCooper (TBC)

Panelists highlighted that the TCFD accelerated the process of integrating climate change among the priorities of the financial sector and agreed on the need to come to a number in dollars at the end to translate impact models results on a return on investment and further get the attention of credit risks officers.

CLOSING REMARKS:  DAMIEN NAVIZET – CLIMATE CHANGE DIVISION CHIEF – AFD 4:45 – 5:00

Damien Navizet concluded the event, reminding one of the key messages of the day: some actors will have to bear the climate risks others will not. He furthermore stressed the importance of not just focusing on the tools to identify and assess risks, but also to think about what the management of these risks means in practice.