This week, world leaders meet in Copenhagen to coordinate their efforts to address global climate change. As summed up by a RiskMetrics fact sheet on the event, the summit's daunting goal is to set fair, achievable emissions reduction targets for both developed and developing nations.

The Financial Times' Martin Wolf has succinctly stated why this will be so difficult:

"…Where [greenhouse gas emissions] abatement occurs must be separated from who pays for it. Abatement needs to happen where it is most efficient. That is why emissions of developing countries must be included. But the cost should fall on the wealthy. This is as much because they can afford it as because they produced the bulk of past emissions."

Private Lenders and Investors in a "Pivotal Position"

How can the global economy equitably share the costs and benefits of climate-related adaptation? Parties to Copenhagen will tackle this problem – eventually – with regulation, taxation and subsidies for carbon-abating investment. Private investors, however, can act now to direct capital towards projects that will thrive in a carbon-constrained economy.

The financial sector will play a crucial role in putting developed-world wealth to work in emerging markets, according to Dr. Peter Thimme and Doug Cogan. In an October Responsible Investor op-ed, they explained why:

"To complete the transition to a low-carbon economy, up to $50 trillion in renewable energy and energy efficiency investments will be required over the next 40 years, mainly in emerging markets. This puts financial institutions in developing and transition economies in a pivotal position: either they find ways to gain from these climate-friendly investment opportunities or face growing adaptation costs that sap available returns."

Best Practices in Emerging Markets

Mr. Cogan, RiskMetrics Director of Climate Risk Management, authored "Addressing Climate Risk: Financial Institutions in Emerging Markets," commissioned by Dr. Thimme's firm, DEG, for shareholder coalition Ceres. As summed up in the RI piece, most of the 64 surveyed firms acknowledge the challenge of climate risk. Far fewer firms are factoring climate risk into their lending and investing.

Still, "Addressing Climate Risk" is subtitled "a best practices report," and it does present instructive examples of climate-focused lending and investing. These examples can be grouped in two broad categories:

1) Focused investment in "clean-tech" projects that reduce emissions, conserve energy, or replace carbon-heavy processes.

2) Research and evaluation of the social and/or environmental impact of all projects seeking financing from the institution.

Examples of the first group include renewable energy investments in Kenya, Romania, and India, and an Argentine firm's conservation of 15,000 acres of forest to offset the impact of a paper mill.

Adding ESG Standards to Risk Management Systems

Beyond these clean-tech plays, there may be greater potential impact from the second approach to climate risk. While only five surveyed firms explicitly study climate risk, 53 of 64 have established a risk management system that addresses overall environmental, social and governance (ESG) risk factors.

"Addressing Climate Risk" presents more details on the risk management system of Mexico's Grupo Finterra, a firm focused on lending in the agribusiness sector. The firm acknowledges that this sector is especially vulnerable to climate change, and its risk rating system reflects this:

"…The rating system assigns clients a grade of A, B, C according to their compliance with a range of environmental and social standards [including climate change-related risks]. Ratings are tailored to the specific project and agricultural activity to capture key risks relevant to the client's business. The company also provides recommendations to help clients increase their scores and comply with the company's standards. These recommendations are tailored to address specific risks to a client's business activities."

Most importantly, the system has teeth: "Low-scoring clients will not receive financing unless these requirements are met," according to the study.

Forging the Missing Link

With an eye on Copenhagen, "Addressing Climate Risk" does assess respondents' involvement with the Clean Development Mechanism (CDM) established by the Kyoto Protocol. So far, trading of such credits has been dominated by developed-world brokerages. Even fewer of the emerging-market firms trade credits than measure climate risk. The prevalence of ESG risk management systems among lenders and investors, however, suggests that these firms already have the tools to account for such risks.

Dr. Thimme and Mr. Cogan believe that the private sector should capitalize on Copenhagen, even if governments fail to do so. As they wrote in RI, "Whatever else comes out of Copenhagen, financial partnerships must be forged to support the huge flow of investment capital intended for the developing world."