Two years ago, in the biggest single whale stranding ever recorded, scientists stumbled upon hundreds of dead whales in a remote area of Patagonia in southern Chile.
Scientists were befuddled as to why so many normally solitary Sei whales ended up in the same area. The most commonly accepted theory is that the whales were poisoned by ingesting prey that contained high levels of biotoxins produced by phytoplankton These harmful algae blooms or red tide events are predicted to become more frequent due to climate change.
The Sei whales are not alone in falling victim to climate-related impacts. In fact, like these poor whales, climate change and efforts to address it threaten to strand key economic assets in the region.
Stranded assets are economic resources that suffer from unforeseen or premature write-downs or devaluations, or that could convert to a liability. It can occur due to environment-related risk factors such as the impacts of global warming or to transition risks associated with regulatory responses to tackle the problem. Three key economic sectors in Latin America and the Caribbean—the fossil fuel industry, tourism and agriculture and forestry—are especially at risk of asset stranding.
The costs of reducing emissions and the risks of not doing so
The region is home to the world’s second largest oil reserves. As countries around the world move to adopt regulations to lower their carbon emissions by reducing the use of fossil fuels, the demand for coal, oil and gas that so many of the region’s economies depend upon could be affected. A study published in the journal Nature estimates that if the world is to effectively address global warming up to 42% of oil, 56% of gas, and 73% of coal reserves in Latin America will need to remain untapped. These assets could therefore become stranded. The economic impact would be especially severe given that many of the region’s fossil fuel companies are state-owned and make major contributions to government coffers.
Rising sea levels caused by global warming will place the Caribbean nation’s popular tourist beaches at risk, potentially stranding the region’s lucrative tourism infrastructure. 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.
The threat of climate change and stranded assets has gotten the attention of investors, policymakers and multilateral institutions. Investors are now seeking to identify those companies taking action to address climate risk and those that are most vulnerable. To help in that process, the G20 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. The recommendations can help both with ensuring that investment plans are consistent with the Paris Agreement’s goal of limiting warming to well-below 2 degrees Celsius as well as avoiding ad hoc processes of carbon emissions reduction that could destabilize markets.
BlackRock Inc., the world’s largest asset manager which has an investment portfolio worth $5.1 trillion, said last month that it plans to engage with companies on how climate change could affect their businesses. In particular, BlackRock 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 toward clean energy is underway.
Renewable energy is progressing rapidly in Latin America and the Caribbean with record levels of investment and new renewable energy capacity being built. 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.
The challenge in the demand for infrastructure
Latin America and the Caribbean’s demand for infrastructure is substantial. As the region’s population and economies grow, we estimate that up to 5% 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 will need to address regional challenges including rapid urbanization, universal access to water and affordable clean energy. Today’s investment decisions 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 reasons are clear: The risk of asset stranding due to an extreme weather event or introduction of a disruptive technology such as electric vehicles could entail huge potential costs for governments and investors. As the recent catastrophic floods and mudslides tragically demonstrate in Peru and Colombia, we confront these risks today.
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% by the end of 2020, and to review proposed projects for climate risk and resilience by 2018.
The key to all of this is improved planning that takes into account climate change and the risks of stranded assets. To this end, 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, build resilience and generate prosperity.
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 interested in 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
