Climate Mainstreaming - Mainstreaming of climate risks and opportunities in the financial sector

Background and Goals

Climate change entails substantial risks for the financial sector, but also brings opportunities. Damages amounting to billions threaten the performance of investments and companies, while at the same time new business segments emerge. If the financial sector succeeds in adapting to this situation rapidly and comprehensively, opportunities could be seized ensuring social and economic value added along with effective climate protection. For some years now, institutional investors, insurance companies, asset managers and pension funds have increasingly been dealing with climate change issues.

Objectives:

Assisting financial services providers to incorporate climate change aspects and to cooperate on answering on open issues in this context is the main topic of this project. The three-year project has the title "Mainstreaming of Climate Risks and Opportunities in the Financial Sector: Climate-related opportunities and risks in insurance, asset management and lending (with a focus on asset management)". Starting from actual requirements voiced by German financial service providers, the project develops and proposes solutions on how to adequately incorporate climate-related risks and opportunities into financial management, including the valuation of companies, financial analysis, risk measurement and control, investment decisions and asset management. The project aims at developing instruments, methods and techniques enabling financial analysts, asset managers, underwriters and investors to integrate climate change and protection considerations into their decision-making process. This applies for both adaptation and mitigation issues.

Content time

to

Research area/region

Country
  • Germany
Region of implementation (all German federal states)
  • Baden-Württemberg
  • Bavaria
  • Berlin
  • Brandenburg
  • Bremen
  • Hamburg
  • Hesse
  • Mecklenburg Western Pomerania
  • Lower Saxony
  • Northrhine-Westphalia
  • Rhineland Palatinate
  • Saarland
  • Saxony
  • Saxony-Anhalt
  • Schleswig-Holstein
  • Thuringia

Steps in the process of adaptation to climate change

Step 1: Understand and describe climate change

Approach and results 

The "Service Group Adaptation" (SGA) will advise on regional climate modelling and regional climate projections, and also, for example, on energy consumption in the future, the demand for transport, and oil price developments.

Parameter (climate signals)
  • Heat waves
  • Extreme precipitation (incl. hail, snow)
  • Storm
Further Parameters 

In particular, changes in the intensity and frequency of extreme weather events.

Step 2a: Identify and assess risks - climate effects and impact

Approach and results 

Climate change is modifying the general climatic and political conditions in such a way that statistical methods and a simple extrapolation of previous trends are no longer suitable for drawing reliable conclusions regarding future developments. Thus, an increasing number of decisions is taken on an uncertain basis. Damages caused by the climate change threaten financial performance, but can also create new business opportunities.

In the course of the project, a remarkable turnaround was noted in many of the project partners: While the climate risks were the focus of interest at the beginning of the project, the dominating interest towards the end lay in the opportunities. This is a need to examine whether and how far Bayesian risk management techniques can help in identifying and evaluating promising investment opportunities.

Step 3: Develop and compare measures

Measures and/or strategies 

Bayesian risk management techniques facilitate improved assessments of climate change impacts, as well as of the climate policy and its financial implications. Results will be achieved in collaboration with selected financial services providers, who can then use them to set the course for improved adaptation and climate protection measures in the economy.

Objectives: Starting from actual requirements voiced by German financial service providers, the project develops and proposes solutions on how to adequately incorporate climate-related risks and opportunities into financial management, including the valuation of companies, financial analysis, risk measurement and control, investment decisions and asset management. Three case studies will be carried out, which will serve to develop and implement new products and procedures. The results of the case studies will be evaluated comparatively. The aim is to arrive at conclusions for products and procedures for the project partners and other institutional investors wishing to deal with their climate risks in asset management.

In order to test the potential of innovative elicitation techniques within the framework of the project, a platform for online markets (PCXtrade) and a platform for on-line questionnaires (PCXquest) was developed by the Potsdam Institute for Climate Impact Research (PIK). Both are accessible via the integrative platform of The Potsdam Climate Exchange (PCX). With the online market platform, virtual (fictitious) securities on physical, regulatory and business-related climate risks can be traded.

An example of the application of the project is the ""SuperSmart Grid"": Driven by the demand of the partners in the financial market, the assumption of a European energy supply based on 100-percent renewable energy sources, the 80-percent emission reduction targeted by he EU by 2050 (compared to 1990), the need for a robust energy system, and the diversification of risks, the project has begun to assess investment opportunities in innovative technologies for a SuperSmart Grid.

Time horizon
  • 2071–2100 (far future)

Step 4: Plan and implement measures

Costs of the measures 

The central focus of the study is the monetary valuation of the consequences of the climate change, and their financial implications.

Participants

Funding / Financing 

BMBF funding programme "klimazwei - Research for Climate Protection and Protection from Climate Impacts"

Project management 

Germanwatch e. V.

Cooperation/Partners 

University of Potsdam;

Potsdam Institute for Climate Impact Research (PIK);

German Institute for Economic Research (DIW);

Wuppertal Institute for Climate, Environment and Energy;

European Climate Forum (ECF).

Industry partners:
Münchener Rückversicherungs-Gesellschaft AG, WestLB AG, Bayerische Hypo- und Vereinsbank AG, Allianz Global Investors and German Association for Financial Analysis and Asset Management (DVFA).

Additional cooperation:
Enhanced Analytics Initiative (EAI), Carbon Disclosure Project (CDP), United Nations Environment Programme Finance Initiative (UNEP-FI), Verein für Umweltmanagement in Banken, Sparkassen und Versicherungen (VfU - Association for Environmental Management in Banks, Savings Banks and Insurance Companies)

Contact

Germanwatch e. V.
Dr. Werner-Schuster-Haus, Kaiserstr. 201
D-53113 Bonn

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Fields of action:
 financial services industry