Adaptation and Vulnerability to Climate Change: The Role of the Finance Sector

The UNEP FI Climate Change Working Group report, launched at the UNFCCC COP 12 in Nairobi, calls for a new approach on part of governments and the private sector to address the physical changes that climate change will bring, integrating adaptation with sustainable economic development and disaster management. A disturbing message is the report’s calculation that economic losses due to climate change could reach 1 trillion USD in a single year by 2040. Both the UNEP FI and Stern reports state that in order to avoid significant costs in the future early action on mitigation and adaptation is required. The UNEP FI report argues that whatever we do to cut emissions, the climate will continue to change in the coming decades, and therefore, adjusting to the expected effects of climate change is a vital complement to mitigation. This is particularly true for the poor, who have no safety net or capital; the natural world, which changes slowly; and sectors with long lead-times such as infrastructure, utilities, forestry; and institutions with lengthy liabilities like pension funds. The report describes some of the current products and services and other innovative approaches used by the finance sector to tackle climate change, such as weather derivatives and natural catastrophe bonds. Many potential markets that could have a major impact, promote adaptation and reduce vulnerability, such as micro-finance and insurance, are not wholly commercially viable as yet, and therefore require a public-private partnership approach to provide the seed capital and skills required. The report’s key message:

  • Adaptation IS economic development — by removing the root causes of vulnerability, such as low incomes, lack of diversity, disease, etc, enhances resilience and generates wealth;
  • Adaptation is also good disaster management – small changes in design can save multiples later and pre-funding can speed recovery;
  • Disaster relief is not the best way to manage risk as it is slow to arrive, hard to budget for, and vulnerability persists.

The report’s recommendation to both policymakers and financial institutions is to mainstream climate change into all levels of decision-making and company operations, and to integrate adaptation with other priorities. Finally, the knowledge and resources required for effective adaptation will not happen without the support of the private sector, and governments need to provide the policy framework and stability for business to operate more effectively in developing countries. The finance sector can play a crucial role by supplying the new markets that will be created with innovative products and services, such as weather derivatives and micro-finance.
Published: 2006 | by: UNEP FI

Adaptation and Vulnerability to Climate Change: The Role of the Finance Sector (576 KB | 36 pages)