Climate change has emerged as one of the most critical risks facing investors. Although historically many investors in emerging markets (EM) have not focused on this issue, climate risk is arguably more important in EM, where the transition to a low carbon economy consistent with the goals of the Paris Agreement is likely to present major challenges. Likewise, as we discussed in a recent report, many EMs are both highly exposed to physical climate risks and, in many cases, less prepared for these effects.

Investors looking to assess climate risk have the benefit of a wide range of global institutions that have emerged in recent decades to assist governments, companies, investors and citizens in grappling with issues around climate change.

We address physical climate change risk from the perspective of emerging markets investors. Climate change affects many countries. However emerging markets are both more vulnerable to climate-related hazards and less prepared to cope with their effects. The risks associated with climate change do not appear to be reflected in valuations of most financial markets. 

Climate risk indices suggest that Nigeria, Pakistan, India and Philippines are particularly vulnerable to physical climate risk, among the major EM and frontier markets. Poland, Chile, Brazil and Russia appear relatively less vulnerable.

This brief is the first in our Carbon Transition Initiative, a series of 12 webinars on the impact of climate change and carbon transition on emerging markets. It accompanies our webinar on the topic in January 2021.