Risk Management and Climate Change: The Role of the Financial Services Sector, A Background Paper

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Major climatic events (bushfires, floods, earthquakes), whether related to ongoing climate change or not, have recently drawn attention to the substantial destruction of wealth which results. They have also highlighted the important need for mechanisms for appropriate risk-sharing of losses and rapid restoration of the affected physical and social capital, as well as mechanisms for inducing investment and behavioural decisions which involve adaptation to the consequences of climate change.

Two aspects of climate change are relevant in this regard. One is the potential for longer run gradual changes in productivity and viability of certain activities (in particular locations) due to climate change. This has implications for investment decisions, the financing thereof, and management of the risks arising from lack of knowledge about precisely how the economic effects of climate change may evolve. The second is the potential for more, and more extreme, catastrophic events as a consequence of climate change. Historical experience and risk modelling based thereon may then prove inadequate for assessing future risks.

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