What are the financial risks of climate change?

The effects of climate change can pose significant long-term financial risks to financial institutions. For this reason, financial institutions need to identify and adequately manage the key financial risks associated with climate change. Learn about the key financial risks associated with climate change in this article.

Transition risks

Climate change financial risks can be significant for financial institutions. For banks, asset managers, and insurance companies, climate risks typically stem from the physical impact of climate change or climate-related transition risks. With regard to transition risks, the transition to a society characterized by reduced CO2 emissions is of great importance. To find out more, go to the internet. In the affected economic sectors, assets on the balance sheet of financial institutions could become illiquid or be exposed to increased valuation risks. In principle, climate-related financial risks can be represented and classified in the traditional risk categories of credit and market risks. It is therefore not a new risk category, but a new risk factor. However, due to the peculiarities of climate risks, there are specific challenges at this stage.

Physical risks

In principle, physical risks are divided into acute and chronic risks. The former are primarily attributable to natural events such as hurricanes or floods. The latter are the longer-term result of climatic processes and their effects, such as sea level rise. These risk factors could generate losses (even unexpected ones) for financial institutions in the traditional risk categories (credit risk, market risk, etc.).