In the private sector, the insurance and banking industries play leading roles as investors, although they focus on different aspects of this business. The role of banks is to cover the credit part (by providing loans), whereas insurance companies act as investors on the capital markets, as well as in the property/ casualty branches; they also insure projects financed by banks. This section focuses on the banking industry.

Environmental issues such as climate change may have substantive impacts on the global economy. From a financial point of view, such problems are regarded as environmentally induced economic risks (Figge, 1998). In general, the size of the players, their diversification, and increasingly sophisticated techniques of risk reduction make it unlikely that banks and asset managers will perceive climate change as presenting any material threat to their economic viability.

On the positive side, banks could provide services and develop financing techniques that accommodate and facilitate adaptation to weather extremes (e.g., private insurance, catastrophe bonds, weather-related trading). Assessment of expected benefits of an investment decision—whether it is a direct investment, through financing of an infrastructure project, or an indirect investment that involves investing in shares—is core to financial institutions. Economic assessment of an investment is based on three different factors: expected revenues, operating costs, and risks. Climate change can have an impact on all three aspects but is probably more important for the risk side of an investment decision (Figge, 1998; Mag, 1990).

Lending and Climate Change

Most private and corporate loans are secured by property. If a region becomes more exposed to climate-related natural disasters such as floods or windstorms, the prices for property could go down—which could result in a loss of confidence in the local economy and may even trigger a credit crunch (Grabbe, 1998; Heinz Center, 2000). As an indirect effect, other types of business such as management of private assets and granting of private loans that are not backed by property also will be affected (Bender, 1991; Thompson, 1996).

In terms of the impacts of climate change on the banking industry, there is no clear scientific evidence on how this sector will be affected. One view is that the banking sector is likely to be largely unaffected by climate change because the sector increasingly transfers loans directly to the capital market through asset-backed securities and similar instruments. The major commercial banks are large and diversified and are getting more so as the industry concentrates in the face of global competition. They prefer not to keep any substantial portion of the loans they make on a long-term basis. Instead, driven by capital constraints and return requirements, they actively syndicate and/or securitize their loan commitments (i.e., sell down the loans or shift the loan exposure to other banks and institutions). Even the portion they retain is increasingly likely to be held for a shorter period of time (a maturity under 1 year is better from a capital requirement standpoint) than other institutional lenders such as insurance companies and pension funds. The question still remains: At the end of the day, who will bear the risk of climate change on investments? It is particularly the insurance and asset management sectors that invest in asset-backed securities. So the insurance industry may even get hit twice, first through direct losses in property-related claims but also through impacts on their investments (Salt, 2000). Detailed information on what this increased vulnerability means for insurers and asset managers must be further explored.

On the other hand, it is obvious that banks could be affected indirectly as climate change affects their customers' operations, consumption, and financial circumstances. Any investment activity could be affected if property insurers withdraw coverage or drastically increase premiums, as happened in Florida and the Caribbean. Sectors that are likely to be affected by a drastic change in the local climate are agriculture and tourism. Warm winters in Europe already have negatively impacted the performance of skiing resorts in the Alps and have led some banks to review their credit applications in view of possible impacts of climate change (Credit Suisse Group, 1999)

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