How Climate Change Creates Financial Risks for Banks and Insurers
Summary
This review explains how climate change can affect financial institutions through physical hazards such as floods and droughts, and transition pressures such as new climate policy, technology shifts, litigation, and changing customer demand. It maps these risks to assets including property, infrastructure, companies, insurers, and government revenue, then considers possible effects on credit, market, operational, liquidity, and legal exposures.
Examples include flooding that could weaken mortgage and municipal bond values and raise insurer claims, and drought scenarios that could sharply increase defaults in some borrower portfolios. The review argues that banks and insurers should incorporate climate factors into financial risk management, use emissions disclosures and scenario analysis, and redirect finance toward lower-carbon activities. It also notes that diversified large banks may absorb regional shocks better, while chronic risks and transition exposures remain difficult to assess. The discussion synthesizes external studies and policy proposals rather than presenting a new empirical model, and emphasizes uncertainty about climate impacts and institutional responses.
Key ideas
- Climate-related financial exposures include both physical hazards and transition risks from policy, technology, and market change.
- Flooding can affect property values, mortgage performance, municipal bonds, and insurers’ claims burdens.
- Drought scenario analysis has found that defaults could rise substantially in some exposed portfolios.
- Banks and insurers need to treat climate factors as part of financial risk management and disclosure.
- Diversification can help institutions absorb localized shocks, but it does not remove long-term or transition risks.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.