World

Opportunities to integrate disaster risk reduction and climate resilience into sustainable finance, May 2019

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Executive Summary

The next European Commission will have a unique opportunity to put disaster risk reduction, climate change adaptation and resilience at the heart of the financial system with its next wave of reforms under the Sustainable Finance Action Plan.

The scale of financial flows and investments is massive. In Europe assets under management reached €25.2 trillion in 2017, 147% of GDP1 . And sustainable investment is growing fast – Blackrock, the world’s largest fund manager, has forecast that the total share of sustainable investments in Exchange Traded Funds globally will increase from today’s 3% of total assets, to 21% of all assets by 20282.

However, most global investments still fail to take disaster and climate-related risk into account. There is a long way to go in ensuring that these risks are understood and integrated into investment decisions, and that financing for prevention and recovery takes place where it is needed and in an equitable way.

We do not have a total picture of Europe’s financial exposure to climate-related disaster risks, but we know that they are already resulting in significant economic losses. The total reported economic losses caused by weather and climate related extremes in European Member States over the 1980–2017 period amounted to almost half a trillion euros3. In the future, losses and disasters from climate impacts risk to increase dramatically if mitigation goals are not met and if we fail to deliver adequate resilience to climate change. Cascading risks may create a further compounding effect.

Europe plans to significantly scale up levels of public and private investment through instruments including InvestEU (the replacement to the European Fund for Strategic Investments), the Capital Markets Union and new measures being delivered under the Sustainable Finance Action Plan. To achieve resilience to disaster and climate risk these public and private investments must be defined by quality as well as quantity and must be based on a data-driven assessment of risk.

Improved risk data will lead to more efficient and stable financial markets and to more effective investment. However, there are also potential costs and harms which could include capital flight from risk-exposed investments, and lack of access to finance for those who need it most. How Europe protects the vulnerable is ultimately a political choice, with the potential to create a Europe that is inclusive and an approach to resilience which is just and equitable.