What Is Risk? Why it Matters for Climate, Economic Development, and Innovation

Although #NYClimateWeek feels like a distant memory in the era of #COP30 and now Davos’ #WorldEconomicForum, the conversations around risk remain strikingly similar. Every session we attended in New York had “risk” on the agenda. Yet, the discussions often bundled all risks together, leaving panels grappling with generalities rather than actionable insights. This prompted us to reflect: What exactly is risk, and why does clarity matter so much especially for climate and economic development projects?

Defining risk: More than just uncertainty

At its core, risk is the potential for adverse consequences, a concept widely used in finance, business, and climate science.

In business and finance, risk is often defined as the probability that actual results will differ from expected outcomes, which can lead to financial loss or reduced profitability. For companies, this could stem from internal decisions or external shocks like regulatory changes, market volatility, or shifts in consumer demand.

In the climate and economic development context, the IPCC frames risk as the potential for negative consequences for human or ecological systems arising from climate change impacts or responses. This includes both physical risks such as floods, droughts, and storms; and transition risks linked to policy shifts, technology changes, and market adaptation to a low-carbon economy.

So, whether you are an investor, policymaker, or entrepreneur, risk is not just about uncertainty, it’s about the interaction of hazards, exposure, and vulnerability, and how these factors shape outcomes.

Why are we still confused about risk?

During the NY Climate Week, we noticed a recurring issue: not all risks are equal, nor do they occur at the same time. Yet, many discussions treated political, commercial, financial, and economic risks as interchangeable. They are not.

• Political risk: This refers to instability or changes in government policies that can disrupt operations, for e.g. think expropriation, civil unrest, or sudden regulatory shifts.
• Commercial risk: Linked to market dynamics, competition, and demand fluctuations, for e.g. demand for toll road and public transit, power purchase agreements.
• Financial risk: Often tied to debt structures, interest rate changes, and liquidity constraints, for e.g. loan amount and tenors, guarantees, step in rights, cash flow sculpting, syndications and blending different sources of finance.
• Economic risk: Broader macroeconomic factors like inflation, currency volatility, and trade disruptions, for e.g. foreign exchange convertibility and transferability, change in law, expropriation, war and conflict.

Confusing these categories leads to poor planning. For example, a solution designed for financial risk (like hedging against interest rate changes) won’t address political instability in a developing country.

Risk in PPP Projects: A comprehensive framework

Public-Private Partnerships add additional layers of complexity to risk management. In PPP infrastructure projects, risks evolve across distinct project phases—development, construction, operations, and transfer—and require different allocation strategies depending on which party can best manage them.

Core PPP Risk Categories:

• Construction risk: Delays, cost overruns, technical failures, and contractor default during the build phase.
• Demand/Revenue risk: Uncertainty about user uptake, traffic volumes, or offtake commitments that affect revenue streams.
• Operational risk: Performance failures, maintenance issues, technology obsolescence, and service quality problems.
• Regulatory/Legal risk: Changes in law, permit delays, environmental compliance, and contractual disputes.
• Force majeure: Natural disasters, pandemics, and other unforeseeable events beyond parties’ control.

The fundamental principle in PPP risk allocation is simple yet powerful: each risk should be borne by the party best able to manage it. Private partners typically assume construction and operational risks given their technical expertise, while public authorities often retain demand risk in availability-payment structures or regulatory risks inherent to sovereign functions.

The rise of young Investors and Founders

One positive trend we observed: many more young investors and founders were in attendance, often with projects tied to developing countries. Their enthusiasm for innovation is palpable. They are bringing passion, creativity, and cultural heritage into regions where few have ventured before. But here’s the challenge: a lack of understanding about the risks involved could derail their ideas before they take off.

Why? Because risk perception shapes investment decisions. If entrepreneurs underestimate political risk or overestimate their ability to manage financial risk, they might face unexpected setbacks, jeopardizing not only their projects but also the communities they aim to serve.

Emerging Markets: Risk as Opportunity, Not Barrier

Here’s a critical perspective that often gets lost in risk discussions: emerging markets should not be avoided simply because risks exist. In fact, properly managed risks in developing countries can yield significantly higher returns than comparable projects in developed markets.

The key is understanding that risk can be segregated, allocated, and mitigated—transforming perceived barriers into structured, manageable opportunities. When investors approach emerging market PPPs with sophisticated risk management, they discover:

• Higher risk-adjusted returns: Properly structured PPP projects in emerging markets typically offer returns 300-500 basis points higher than comparable developed market infrastructure.
• First-mover advantages: Early entrants who understand risk mitigation build competitive moats and establish valuable relationships with host governments.
• Portfolio diversification: Emerging market infrastructure provides uncorrelated returns to traditional developed market assets.
• Development impact: Beyond financial returns, these projects create measurable social and economic value, increasingly important for ESG-focused investors.

The crucial shift in mindset is this: don’t ask “Should we invest given these risks?” Instead ask: “How can we structure this investment so each risk is appropriately allocated and mitigated?”

Risk in climate and economic development projects: A layered challenge

Climate-related projects amplify complexity. Risks here are multi-dimensional:

• Physical risks: Extreme weather events damaging infrastructure.
• Transition risks: Policy changes pushing for rapid decarbonization.
• Social risks: Community resistance or cultural misalignment.
• Operational risks: Supply chain disruptions or technology failures.

Moreover, these risks interact. For instance, a flood (physical risk) can trigger economic instability, which in turn heightens political risk. Understanding these linkages is critical for resilience planning.

Practical Risk Mitigation Tools for PPP Practitioners

Understanding risks is only the first step. Sophisticated investors and public sector practitioners should be aware of the extensive toolkit available to mitigate PPP project risks:

For Political Risks:

• Political Risk Insurance (PRI): Organizations like MIGA (Multilateral Investment Guarantee Agency) offer coverage against expropriation, currency inconvertibility, breach of contract, war and civil disturbance, and non-honoring of financial obligations. These guarantees operate for up to 15 years and can cover both equity and debt investments.
• Development Finance Institution (DFI) participation: IFC, EBRD, ADB, and other DFIs provide credibility and deterrent effect through their involvement, as host governments are reluctant to take actions that would harm relationships with multilateral institutions.
• Cross-default provisions: Structuring agreements so that default on the PPP contract triggers default on other sovereign obligations, increasing the cost of breach.

For Commercial and Demand Risks:

• Minimum revenue guarantees: Government commitments to cover shortfalls if demand falls below specified thresholds, common in toll road and public transport projects.
• Take-or-pay contracts: Offtake agreements requiring payment regardless of usage, frequently used in power generation PPPs.
• Availability payments: Shifting from user-pay to government-pay models where private partner receives payments based on asset availability rather than demand.
• Revenue-sharing mechanisms: Agreements where government participates in upside revenue beyond certain thresholds, aligning public and private interests.

For Financial Risks:

• Currency hedging: Using derivatives, swaps, and forward contracts to manage foreign exchange exposure.
• Partial credit guarantees: World Bank Group and DFIs can guarantee specific portions of debt, improve credit ratings and reducing borrowing costs.
• Blended finance structures: Combining concessional public or philanthropic capital with commercial investment to improve overall project returns and risk profiles.
• Step-in rights: Provisions allowing lenders to temporarily take control if the project company faces difficulties, protecting debt service continuity.

For Construction and Operational Risks:

• Performance bonds and guarantees: Financial commitments from contractors and operators to ensure completion and performance standards.
• Insurance packages: Comprehensive coverage for construction all-risk, professional indemnity, operational liability, and business interruption.
• Liquidated damages provisions: Pre-agreed compensation for delays or performance failures, allocating risk clearly in contracts.
• Independent technical review: Third-party experts monitoring construction and operations to catch issues early.

For Regulatory and Legal Risks:

• Stabilization clauses: Contract provisions protecting investors from adverse changes in law by guaranteeing compensation or contract adjustment.
• International arbitration: ICSID or ICC arbitration clauses providing neutral dispute resolution outside domestic courts.
• Change-in-law provisions: Mechanisms for sharing costs of regulatory changes between public and private partners.
• Robust legal frameworks: Comprehensive PPP laws clearly defining rights, obligations, and procedures, reducing uncertainty.

Partnerships: The missing piece

The pieces of the puzzle exist: public sector frameworks, private sector capital, and entrepreneurial energy. But partnerships between governments and businesses must be well-matched, planned, and implemented. Misaligned expectations can create new risks rather than mitigate existing ones.

For example, a government may prioritize long-term climate resilience, while a private investor seeks short-term returns. Without clear alignment, projects stall or fail, eroding trust and wasting resources.

Partnership as risk sharing: Crucially, PPPs should be viewed as risk-sharing arrangements where responsibilities and exposures are distributed fairly based on each party’s ability to manage specific risks. This ensures that neither party bears disproportionate risk and that projects remain resilient under uncertainty. The public sector typically retains risks it can best manage (regulatory, demand in some cases, social license) while transferring construction, operational, and technology risks to private partners with relevant expertise.

So, What Can We Do?

• Differentiate risks clearly: Stop lumping all risks together. Use structured frameworks like the G20 PPP Risk Allocation Tool to identify political, financial, operational, and climate-related risks separately and allocate them appropriately.
• Invest in risk literacy: Equip young founders and investors with tools to assess and manage risks. This includes scenario planning, stress testing, and understanding available mitigation solutions—from PRI to blended finance to contractual protections.
• Embrace emerging markets strategically: Rather than avoiding developing countries due to perceived risks, approach them with sophisticated risk segregation and mitigation strategies. Work with experienced advisors who understand local contexts and available de-risking instruments.
• Leverage institutional support: Engage early with multilateral development banks (World Bank Group, regional development banks) and DFIs that can provide technical assistance, co-financing, and guarantee products that dramatically improve project bankability.
• Embed risk management in innovation: Innovation thrives when uncertainty is managed and not ignored. Risk assessment should be part of the design phase, not an afterthought. Build risk mitigation into project structures from day one.
• Foster cross-sector collaboration: Public-private partnerships should include joint risk assessments and shared accountability mechanisms. Conduct thorough risk workshops during project preparation where all parties map risks, agree on allocation, and identify appropriate mitigation tools.
• Structure for bankability: Work backwards from what makes projects financeable. Understand what lenders and equity investors need to see—credit enhancements, revenue certainty, strong legal frameworks—and build these elements into project design.

Final Thoughts

Risk is not the enemy, it’s a reality. In fact, risk and opportunity are two sides of the same coin. For climate and economic development projects, understanding risk is the first step toward unlocking innovation and resilience.

For those considering investments in emerging market infrastructure and PPP projects, remember: the question is not whether risks exist—they always do, even in developed markets. The question is whether you have the knowledge, tools, and partnerships to properly allocate and mitigate those risks. When done well, emerging market PPPs offer not only superior financial returns but also meaningful development impact.

As we move toward the next COP and beyond, let’s ensure that our conversations about risk are not just about fear, but about strategy, clarity, and action. Let’s focus on practical solutions—the extensive toolkit of guarantees, insurance products, contractual mechanisms, and institutional support available to transform risks into structured, manageable, and ultimately profitable opportunities.

What are you seeing in your discussions on risks? Are we moving toward more nuanced conversations or are we still stuck in generalities? Share your thoughts by writing to contact@wappp.net.