Climate-related risks are one of the most challenging macroeconomic risks to quantify, and they encompass two distinct categories: physical and transitional. Climate costs to physical infrastructure, industry and economic output worldwide will add up to 1 trillion USD annually by 2040.
Understanding climate impacts and their risks to companies can help avoid current and future liabilities as well as increase profits. As climate related-risks become more consequential, regulators face increasing pressure from investors and stakeholders to regulate emissions and climate risks of publicly-owned companies. As such, climate risk should be integrated into risk management and compliance practices.
The region of Latin America and the Caribbean, in particular, will face important revenue losses from oil and gas royalties as the world transitions away from fossil fuel, as well as from other exports, such as beef. Likewise, the transition will bring big shifts in asset values and higher costs of capital if countries do not address potential risks now.
The average level of disclosure of climate risk in LATAM went up by 9% from 2019 to 2021. However, the overall number of reporting companies was barely 42, the lowest of all regions. Particularly, the lack of mechanisms to identify, analyze, and manage climate risks is the main barrier in the region to fail to manage them. On the other hand, opportunities and upsides for firms and other entities that identify and manage these risks—particularly first-movers—can be many, speaking to the need to build capacity now.