Climate Risk Financial Impact Assessment
Long-term analysis of climate risks to financial stability
Executive Summary
This report examines the evolution of climate-related financial risks and their potential impact on global financial stability. As the physical effects of climate change intensify and the transition to a low-carbon economy accelerates, financial systems face both physical and transition risks that could lead to significant asset revaluations, credit losses, and market disruptions.
Key Finding #1
Physical risk exposure is highly concentrated geographically and in specific sectors
Key Finding #2
Transition risks may materialize suddenly if policy action is delayed
Key Finding #3
Financial system exposure to high-carbon sectors exceeds $7 trillion globally
Climate Risk Overview
Climate-related financial risks arise through two primary channels: physical risks and transition risks. Physical risks stem from climate and weather-related events, potentially resulting in property damage, reduced productivity, and supply chain disruptions. Transition risks emerge from the process of adjustment towards a lower-carbon economy, influenced by changes in climate policy, technology, and consumer and investor preferences.
Our analysis indicates that while physical risks are growing steadily as climate change progresses, transition risks could manifest more suddenly, particularly if climate action is delayed and subsequent policy responses need to be more abrupt and disruptive.
Evolution of Climate Risk Channels
Sectoral Exposure to Climate Risks
Climate Risk Exposure by Economic Sector
High Exposure Sectors
The energy sector faces the highest combined exposure to climate risks, with significant transition risks stemming from potential stranded assets in fossil fuel reserves and infrastructure. Utilities, materials, and transportation sectors also show substantial exposure to both physical and transition risks.
The agriculture sector faces particularly high physical risk exposure due to changing precipitation patterns, temperature increases, and more frequent extreme weather events affecting crop yields and production stability.
Financial System Implications
Financial institutions' lending and investment exposures to these high-risk sectors could lead to increased credit losses, market volatility, and liquidity challenges. Our analysis estimates that global financial system exposure to high-carbon sectors that face significant transition risks exceeds $7 trillion.
Insurance companies face dual challenges from climate change: increased claims from physical damage events and potential devaluation of investment portfolios with high carbon exposure.
Geographic Distribution of Physical Risks
Physical risks from climate change are unevenly distributed globally, with coastal regions, areas prone to extreme weather events, and regions dependent on climate-sensitive industries facing the highest exposure.
Physical Climate Risk by Region
Coastal Vulnerability
Rising sea levels and increased storm severity threaten coastal infrastructure worth over $2.5 trillion globally.
Agricultural Impacts
Changing precipitation patterns could reduce agricultural productivity by up to 30% in some regions by 2050.
Energy System Stress
Increased cooling demand and reduced hydropower capacity could stress energy systems in many regions.
Transition Risk Timeline
The timing and speed of the low-carbon transition significantly influence the magnitude of financial impacts. Our analysis models three potential transition pathways: orderly (early and gradual policy action), disorderly (late and sudden policy action), and failed (insufficient policy action to meet climate goals).
A disorderly transition presents the highest financial stability risks, as it would necessitate more abrupt policy changes, leading to sudden asset revaluations and market disruptions. The financial impact could be 2-3 times higher than in an orderly transition scenario.
Financial Impact Under Different Transition Scenarios
Carbon Pricing Scenario Analysis
Carbon pricing mechanisms are expected to expand globally and increase in price to meet climate targets. We modeled the financial impact of different carbon pricing trajectories on corporate profitability and asset valuations.
Carbon Price Trajectories Under Different Policy Scenarios
Key Carbon Pricing Insights
- A carbon price of $75-100/tCOâe by 2030 is likely needed to align with net-zero pathways
- Energy and materials sectors could see profit impacts of 30-40% without significant business model changes
- Carbon pricing would create competitive advantages for companies with lower emissions intensities
- Regional differences in carbon pricing implementation could lead to carbon leakage and competitive distortions
Sustainable Finance Investment Trends
Global Investment Allocation Trends
Sustainable finance has grown rapidly, with global sustainable investment assets reaching $35.3 trillion in 2024. This growth reflects increasing investor awareness of climate risks and opportunities, as well as expanding regulatory requirements for climate risk disclosure and management.
While this represents a positive trend for financing the low-carbon transition, challenges remain in ensuring effective capital allocation to genuine climate solutions rather than "greenwashing." The development of robust taxonomies, standards, and disclosure requirements is critical to supporting market integrity.
Financial institutions are increasingly integrating climate considerations into risk management frameworks, stress testing, and capital allocation decisions, though significant methodology and data challenges persist.
Recommendations for Financial Stability
For Financial Institutions
- Develop robust climate risk assessment methodologies for both physical and transition risks
- Conduct regular scenario analysis and stress testing using multiple climate pathways
- Integrate climate considerations into governance, strategy, and risk management frameworks
- Enhance disclosure of climate-related financial risks aligned with TCFD recommendations
- Develop transition plans to align portfolios with net-zero emissions by 2050
For Policymakers
- Implement clear, predictable policy pathways for the low-carbon transition
- Develop standardized climate risk disclosure requirements and taxonomies
- Integrate climate risks into financial regulatory frameworks and supervisory expectations
- Support development of climate-related data, metrics, and methodologies
- Consider macroprudential tools to address systemic climate-related financial risks
Conclusion
Climate change presents unprecedented challenges to the global financial system through both physical and transition risk channels. The magnitude and timing of these risks depend significantly on climate policy pathways, technological developments, and adaptation measures.
While significant progress has been made in understanding and measuring climate-related financial risks, considerable work remains to fully integrate these considerations into financial decision-making and supervision. The orderly transition to a low-carbon economy requires coordinated action from financial institutions, regulators, and policymakers to ensure financial stability through this transformation.
"The financial risks from climate change are unprecedented in their breadth, magnitude, and potential for systemic impact. Yet they also represent an opportunity to build a more resilient financial system that can support the transition to a sustainable economy."
Download Data
All charts and data from this report are available for download.
Related Risk Reports
Global Liquidity Trends Report
January 15, 2025
Analysis of global liquidity conditions, central bank interventions, and implications for financial market stability.
Read Report âSovereign Debt Crisis Risk Monitor
November 5, 2024
Analysis of global sovereign debt levels, sustainability metrics, and potential triggers for sovereign debt crises.
Read Report âShare This Report
Sources
- Climate Finance Institute. (2025). Climate-Related Financial Risk Assessment Framework.
- Network for Greening the Financial System. (2024). Climate Scenarios for Central Banks and Supervisors.
- Task Force on Climate-related Financial Disclosures. (2025). Status Report.
- International Monetary Fund. (2024). Global Financial Stability Report: Climate Change and Financial Stability.