The Impact of Climate Change on Financial Institutions: How to Prepare and Respond / By: Samantha Loies

Climate change poses significant challenges to financial institutions worldwide. As the planet warms and extreme weather events become more frequent and severe, the financial sector faces many risks, ranging from physical damage to investments and reputational damage. Extreme weather events can damage physical assets. These disasters can disrupt economic activities, impairing the ability of borrowers to repay loans and triggering defaults, further straining the financial system. After a study, the results show that around 60% of banks still need a climate risk stress-testing framework (European Central Bank, 2023) . With the growing awareness of environmental issues, investors are increasingly scrutinizing companies' environmental practices. Financial institutions heavily invested in industries with high carbon footprints may face significant asset devaluation as policies and consumer preferences shift towards sustainability. Additionally, stranded assets pose a substantial risk to financial institutions. According to Greg Gelzinis and Graham Steele, The Economist’s Intelligence Unit estimates that the current value of direct private investor losses globally due to the physical risks of climate change is between $4.2 trillion and $13.8 trillion, depending on the warming scenario (Gelzinis, Steele 2019) . Governments worldwide are implementing policies to mitigate climate change, such as carbon pricing mechanisms and stricter environmental regulations. These changes can directly impact financial institutions through increased compliance costs and changes in lending practices. To assess the resilience of a company to climate change risks, Sarah Steigwald, a financial advisor, says, "When assessing companies' resilience to climate change, it is most important to analyze geographic exposure, infrastructure robustness, past experiences, risk management practices, and adaptation strategies the company may use." Moreover, climate change can have profound implications for insurance companies. To mitigate these risks, insurers may need to reassess their pricing models, underwriting standards, and risk management strategies. Climate change and financial institutions may also affect regular consumers. Ryan Fardy, a Walter Payton student, describes how financial institutions might combat the effects of climate change. "I think financial institutions can contribute to addressing climate change through more advocacy for regulatory measures promoting environmental responsibility and sustainability overall." Addressing these risks requires proactive measures, including incorporating climate considerations into risk management practices and supporting the transition to a low-carbon economy. Failure to address these risks could expose financial institutions to significant economic losses and undermine long-term sustainability. List Sources: https://www.bankingsupervision.europa.eu/about/climate/html/index.en.html   https://www.americanprogress.org/article/climate-change-threatens-stability-financial-system/   Sarah Steigwald, Financial Advisor Ryan Fardy, Walter Payton Student