The finance and insurance sectors have an important role to play in helping companies address some of the risks associated with climate change and unsustainable natural resource extraction. These risks include transition risks (such as changing technology, business models and consumer demands from the transition to a low-carbon economy), water-related risks (such as water pollution, water scarcity, and flooding), resource-related risks (including stranded assets and scarcity of certain minerals), and natural capital-related risks (such as ecosystem degradation, deforestation, air pollution, and soil nutrient loss). Some of these risks are diversifiable for the finance sector but many are systemic and impossible to avoid.
The need to build resilience to a broad suite of shocks and the importance of better risk management are also impacting development finance. The UN’s Addis Ababa Agenda creates a new global framework for development finance by considering a much broader approach to financing sustainable development and by recognizing the importance of the private sector in delivering more resilient development, by increasing awareness of risks and encouraging mitigation from companies and governments as a condition of financing. The insurance sector in particular offers important resilience and risk management products, providing timely post-crisis finance. Catastrophe bonds can serve a similar purpose in providing much needed liquidity in the immediate aftermath of shocks.