Greening Colombia's Financial System

Colombia’s financial sector is exposed to climate risks, while also playing an increasingly important role in mobilizing finance for climate action. Climate change can affect the Colombian economy and destabilize its financial sector through the materialization of both physical risks, which emanate from natural disasters and global warming and can lead to economic costs and financial losses, and transition risks, which are associated with economic adjustment costs during the transition toward a greener, carbon neutral economy. For example, the large-scale riverine floods of 2010 and 2011 led to combined damages of $7 billion (2 percent of GDP), which induced a significant increase in bank loan loss provisions. The decarbonization plan in Colombia considers a 51 percent reduction of GHG emissions in 2030 compared with 2010; during that transition, banks may face write-offs on loans to polluting companies that face additional costs or cannot comply with regulations. At the same time, climate change represents an opportunity to mobilize new and greater resources for climate-resilient and low-carbon investment. In October 2021, Colombia became the first Latin American country to issue local currency green bonds on the domestic market, raising Col $750 billion. Banks have also issued green bonds, and pension funds have invested in them.