Climate-Related Financial Risks (2024)

FAQs

What are the financial risks of climate risk? ›

Exposures manifest themselves through increased default risk of loan portfolios or lower values of assets. For example, rising sea levels and a higher incidence of extreme weather events can cause losses for homeowners and diminish property values, leading to greater risks in mortgage portfolios.

The Task Force on Climate-related Financial Disclosures, or TCFD, is a global organization formed to develop a set of recommended climate-related disclosures that companies and financial institutions can use to better inform investors, shareholders and the public of their climate-related financial risks.

“The cost of extreme climate events topped $30 billion annually in 2021. Climate damages mean higher insurance bills and less profitable companies in sectors like agriculture. Recovery costs mean less money to spend on productive industries such as infrastructure and education.

The CRFRA, or SB 261, requires certain entities doing business in California to prepare and submit climate-related financial risk reports that cover climate-related financial risks consistent with recommendations from the Task Force on Climate-Related Financial Disclosure (TCFD) framework.

Some common financial risks are credit, operational, foreign investment, legal, equity, and liquidity risks. In government sectors, financial risk implies the inability to control monetary policy and or other debt issues.

Executive Order 14030 articulates a policy to advance the disclosure of climate-related financial risk and act to mitigate that risk and its drivers while achieving a net-zero emissions economy by 2050.

It is organized around the four core TCFD pillars: governance, strategy, risk management, and metrics and targets.

Typically, banks put climate-related risks into two buckets:

They include extreme weather events and long-term shifts in climate leading to the closing of retail branches or facilities, negatively impacting the creditworthiness of clients, and adversely affecting asset prices.

2 In 2022 alone, the cost of climate and weather disasters in the United States totaled more than $176 billion – the third most costly year on record, and 13 percent of Americans reported economic hardship from disasters or severe weather events within the past year.

What is the problem with climate finance? ›

However, the figure was not reached by 2020, nor is it deemed sufficient to cover the needs of developing countries. Beyond the level of financing, there are claims of an unjust distribution of funds. Moreover, most of the money is given as loans, exacerbating debt problems in many developing countries.

Climate change will put at risk around 2 percent of global financial assets by the year 2100. A worst case scenario could see up to 10 percent of global financial assets being at risk by 2100. Such is the scale of the devastation that we should be ready for – and we need to accelerate our preparation now.

What is Climate-related Financial Risk? Climate-related financial risk encompasses several different types of risk. Transition risks involve changes in law, policy, technology, and markets related to the transition to a lower-carbon energy supply.

The principles are intended to support efforts by financial institutions to focus on key aspects of climate-related financial risk management. The principles cover six areas: governance; policies, procedures, and limits; strategic planning; risk management; data, risk measurement, and reporting; and scenario analysis.

Factors affecting financial risks

Broadly, these fall under two categories: external factors - including economic downturns, market rates, industry changes, law changes, etc. internal factors - including underperformance, poor cashflow management, bad investments, new competition, staff issues, etc.

Climate risks could affect the Budget and the overall fiscal outlook through a number of pathways, including altering total tax revenue through effects on Gross Domestic Product (GDP) growth, and changing Federal spending to respond to climate impacts, both to ameliorate climate damages and spur the transition to clean ...

What Does Climate Risk Mean to Investors? From an investor's perspective, climate changes pose a great threat, which could negatively impact economic growth, inflation and investment returns. We differentiate between two types of climate risk: physical risk and transition risk.