Two years ago scientists stumbled upon hundreds of dead whales in a remote area of Patagonia in southern Chile in the biggest single whale stranding ever recorded.
Scientists were befuddled as to why so many normally solitary Sei whales ended up in the same area. It is suspected, the whales may have been poisoned by ingesting prey during the algae bloom that had accumulated biotoxins produced by phytoplankton. These harmful algae blooms or red tide events are predicted to become more frequent due to climate change.
These Sei whales are not alone in falling victim to climate-related impacts. In fact, climate risks could lead to highly valuable assets becoming especially vulnerable across the world in Latin America and the Caribbean–a process known as stranding.
Stranded assets are defined as assets that have suffered from unforeseen or premature write-downs, devaluations, or could convert to liabilities. Stranding can occur due to environment-related risk factors such as the impacts of climate change as well as transition risks including regulatory responses to global warming. Three key economic sectors in Latin America and the Caribbean—the fossil fuel industry, tourism and agriculture and forestry—are exposed.
The region is home to the world’s second largest oil reserves. These assets could become stranded as regulations to combat global warming tighten and demand for fossil fuels shifts globally. This could have a major impact on government finances as many fossil fuel companies are state-owned and make significant budgetary contributions. If the world is to avoid disastrous climate change, an estimated 60 to 80 percent of global fossil fuel reserves should not be burned. A study in Nature brings this estimate to 42 percent of oil, 56 percent of gas, and 73 percent of coal reserves in Latin America.
Caribbean nations could see its tourism infrastructure stranded by the physical changes in its popular beaches due to sea level rise. Agriculture and forestry are also vulnerable to climate change due to increased drought and desertification. With large numbers of people employed in the agricultural sector, climate impacts could severely affect arable lands forcing people to abandon their homes and livelihoods.
As investors become more concerned about climate risk, they have struggled to identify companies taking action and those which are most vulnerable. The Financial Stability Board’s Task Force on Climate-related Financial Disclosures provides a set of recommendations to help organizations disclose information needed by investors to assess and price climate-related risks and opportunities. These recommendations could prove essential to ensure investment plans are consistent with the Paris Agreement’s goal of limiting warming to well-below 2 degrees Celsius and avoiding a haphazard process of decarbonization that could destabilize markets.
BlackRock Inc., the world’s largest asset manager which has an investment portfolio worth $5.1 trillion, said this month it plans to engage with companies on the climate change implications on businesses. In particular, BlackRock said it expects the entire board of companies in sectors that contribute to and are affected by climate risk, including oil producers and real estate companies, to develop strategies to account for and address climate change..
The Paris Agreement’s entry into force last year sends a strong signal that the transition away from fossil fuels towards clean energy is underway.
Renewable energy has taken giant leaps in Latin America and the Caribbean with record levels of investment and online services to address new capacity. This growth can help countries decrease the reliance on costly fossil fuels imports and reduce vulnerability to climate impacts, including droughts, which undermine the region’s hydroelectric capacity.
Another implication of economic growth in the region is an uptick in demand for infrastructure. As the region’s population and economies grow, we estimate that up to 5 percent of Latin America’s GDP or roughly $250 billion per year will be required to meet future demand for infrastructure. Private sector investment will be essential to help governments foot the bill.
This infrastructure should address regional challenges including rapid urbanization, universal access to water and affordable clean energy. Investment decisions made today must factor in both the physical and transitional risks posed by climate change. These decisions will also determine whether and how countries will deliver on their emission reduction targets.
A key priority for the Inter-American Development Bank Group (IDBG) is to mainstream climate risk into investment decision-making processes, especially for infrastructure. The risk of asset stranding after only a few years due to an extreme weather event or introduction of a disruptive technology could entail huge potential costs for governments and investors.
To bring its operations into line with the Paris Agreement, the IDBG’s governors set a goal last year to increase climate-related financing to 30 percent by the end of 2020, and to review proposed projects on climate risk and resilience by 2018.
To help meet this goal we launched a new platform, NDC Invest, to support countries transform their national climate change plans into attainable investment plans. These plans can act as a catalyst to spur investment, encourage new technologies, and foster greater innovation that can help reduce emissions to build resiliency and generate prosperity.
To complement these plans, the preparation of mid-century low emission development strategies can support countries to identity appropriate investments pathways that promote low carbon resilient development and reduce the potential for asset stranding. The 2050 plans are an opportunity to maximize the benefits of the shift to a low-carbon economy by aligning climate strategies with long-term economic planning.
The U.S., Canada, Mexico, France, Benin and Germany are ahead of the curve and have already published mid-century strategies. Other countries including Brazil, Colombia, Costa Rica, Peru and Chile appear to be following suit.
Through the implementation of the national climate plans combined with the design of ambitious 2050 strategies, Latin American and the Caribbean will be far better equipped to reduce their exposure to climate risk and asset stranding.
Amal-Lee Amin is Chief of the Climate Change Division at the Inter-American Development Bank.
