Climate Variables for Financial Risk Monitoring

The integration of climate risk management supported by EO-based products and services has significant potential for financial risk monitoring, especially those linked to physical risks such as extreme weather events (e.g., floods, droughts, heatwaves) and climate shifts. Identifying a set of operational climate variables such as temperature, precipitation, wind speed, and sea level rise can provide a framework for IFIs to evaluate financial risk. These variables, derived from globally recognized datasets like the Global Climate Observing System’s Essential Climate Variables (ECVs), can be narrowed down to those most relevant to the financial sector’s exposure, especially in relation to sectors such as agriculture, infrastructure, and financial services.

Climate risk finance mechanisms, such as insurance and disaster risk financing, can be tailored based on robust data provided by ecosystem maps and climate risk models. This data-driven approach allows for better allocation of resources, ensuring that investments are made in the most vulnerable regions and sectors. By leveraging EO data, stakeholders can enhance their ability to respond to climate change, manage and mitigate risks more effectively.

To effectively monitor financial risk, it is necessary to tailor these climate variables to the specific needs of the partner country, where data may be limited or fragmented. The selected climate variables should capture the physical impacts that can disrupt economic activities and affect asset values. The application of these climate variables should be supported by an operational platform that allows financial actors to visualize and assess the risks. A dashboard or online interface can provide real-time climate data, financial exposure estimates, and vulnerability assumptions, making it easier for financial institutions in developing countries to monitor climate risks. This offers a simple, user-friendly way to integrate climate data into risk assessments, enabling users to make informed decisions based on both quantitative metrics (like financial losses or value-at-risk models) and qualitative risk indicators (such as a risk index). By combining both approaches, financial institutions can create a more comprehensive understanding of their climate-related risks.