Tag: Climate Risk

In 2013, while conducting research for my Master’s thesis, I met corporate leaders who did not understand why climate change was something businesses were being held responsible for. They were often quite resentful, and yet, nearly all of their organisations had suffered from the Mumbai floods that happened that year- for one of them, a logistics company, the losses were so heavy they planned to shift their warehouses out of the city.

Climate change was viewed as a political issue, even as it was already disrupting operations. However, climate risk is no longer about ethics or disclosure; it is about competitive survival.

The point is not abstract. During Hurricane Sandy in 2012, a widely shared image showed the Goldman Sachs building in lower Manhattan lit and operational while much of the surrounding area was dark. The firm had invested heavily in resilience infrastructure. Business continuity became a competitive advantage.

In a 2015 speech,² Mark Carney, then Governor of the Bank of England, argued that climate change is a “tragedy of the horizon” because its worst effects will be felt beyond the traditional horizons of business planning, political cycles, monetary policy, and financial regulation. Current decision‑makers therefore have weak incentives to act even though future generations will bear the costs, creating a structural mismatch between where the risks sit and where the power to respond lies.

He highlighted three channels through which climate change threatens financial stability:²

• Physical risks: losses from more frequent and severe floods, storms, heatwaves, and other weather‑related disasters.
• Liability risks: lawsuits and compensation claims against firms and directors for contributing to or failing to manage climate harms.
• Transition risks: repricing of assets as policy, technology, and consumer preferences shift toward a low‑carbon economy, creating “stranded assets,” especially in fossil fuels.

Because standard risk models and planning cycles rarely look out beyond a decade, they miss non‑linear climate shocks and underestimate the scale of structural change required, especially under scenarios that keep warming well below 2°C.³⁴

Climate change is no longer a CSR issue; it is a core strategic, financial, and operational risk⁵⁶ affecting supply chains, asset location decisions, insurance costs, regulatory exposure, consumer demand, and access to capital.

Breaking the tragedy of the horizon requires extending risk management beyond conventional timeframes and embedding climate risk into today’s decision systems. We are already experiencing climate risk, and there is no way to fully insulate every asset from its effects.

For financial institutions, climate risk shows up as credit risk (borrowers’ ability to repay), market risk (asset price changes), operational risk (disruptions to operations), and reputational risk (backlash over financing high‑emitting activities). Empirical work on banks shows that exposures to transition risk are currently modest in portfolio terms but concentrated in specific sectors, and that banks signing net‑zero alliances have begun to reduce lending to the riskiest industries.⁷⁸

For corporations, the following may help:

• Risk identification: Map climate hazards and drivers (heat, floods, drought, storms, sea‑level rise; carbon prices; regulations; technology shifts) to specific assets, operations, and supply chains.
• Assessment and quantification: Use tools ranging from high‑level heatmaps to asset‑level hazard models and financial impact assessments (e.g., revenue at risk, cost of goods sold, capex needs).
• Integration into Enterprise Risk Management (ERM): Incorporate climate risks into risk registers, materiality assessments, internal controls, and capital budgeting, with clear thresholds for escalation.

For financial institutions, more technical steps include:

• Exposure mapping: Quantify portfolio exposure to vulnerable sectors and geographies as a share of lending and investment books.
• Climate-adjusted credit analysis: Incorporate emissions intensity, transition plans, and physical risk exposure into underwriting and pricing.
• Scenario stress testing: Use Network for Greening the Financial System (NGFS) or equivalent scenarios to assess losses under combinations of policy tightening and physical shocks.

Regulators increasingly expect banks and insurers to demonstrate that climate risks are integrated into their internal capital adequacy assessments, risk appetite statements, and supervisory dialogues.⁹

For banks and investors, an important nuance is that reducing portfolio emissions too mechanically by divesting from high‑emitting sectors can undermine real‑economy transition, because those same sectors (power, steel, transport) require capital to decarbonise. Leading practice therefore shifts from simple “brown exclusion” to engagement, conditional finance, and transition‑linked instruments.¹⁰¹¹

All of this reframes climate change from a distant macro-risk into an immediate business continuity problem. The question is no longer whether climate risk matters, but how organisations operationalise it within decisions made today. Businesses and financial institutions must change how they allocate capital and design products. Climate‑aligned finance involves both reducing exposure to misaligned activities and growing exposure to solutions.¹²

For non‑financial corporates:

• Shift capex toward energy efficiency, low‑carbon technologies, and resilience measures (e.g., relocating assets, flood‑proofing, cooling infrastructure), guided by scenario‑tested business cases.
• Integrate internal carbon pricing into investment decisions and product design to reflect transition risk and incentivise low‑carbon choices.
• Explore innovative risk‑sharing instruments, such as parametric insurance for climate‑related losses or resilience bonds linked to infrastructure upgrades.

For financial institutions:

• Develop green and sustainability‑linked products (green bonds, sustainability‑linked loans, transition bonds) with clear use‑of‑proceeds criteria and performance‑based pricing.
• Use portfolio alignment tools (e.g., implied temperature rise metrics, sectoral pathways) to steer lending and investment toward net‑zero‑compatible activities, while monitoring credit risk.
• Avoid “paper decarbonisation” that simply sells high‑emitting assets to less regulated owners; instead, engage with clients to finance credible transition plans and set conditions for continued support.

Research shows that, so far, banks’ transitions have been gradual and often focus more on emissions metrics than on real‑economy outcomes, underscoring the need to link commitments to enforceable policies and incentives.

To translate this into an actionable agenda, organisations can focus on a staged approach:

1. Diagnose and govern: Brief boards on climate risk exposure. Assign clear oversight at board and executive levels.
2. Measure and disclose: Strengthen scenario analysis, emissions tracking, and exposure metrics. Build data systems aligned with emerging standards.
3. Integrate into risk and strategy: Embed climate considerations into ERM, capital budgeting, procurement, and sector strategies.
4. Align capital and incentives: Set science-based targets with interim milestones. Adjust lending and investment policies to phase out clearly misaligned activities while scaling transition and resilience finance.
5. Engage and collaborate: Work with regulators, alliances, clients, and suppliers to raise standards and avoid a race to the bottom.

Traditional business continuity frameworks assume that shocks are temporary, insurable, and geographically contained. Climate risk increasingly violates all three assumptions. The tragedy of the horizon is therefore not just about time, but about governance. Climate risks accumulate slowly, crystallise suddenly, and cascade across balance sheets, supply chains, and communities. By the time they appear in backward-looking metrics, strategic options have already narrowed.

For corporations and financial institutions alike, the challenge is no longer one of awareness or disclosure. It is whether decision-making systems — capital allocation, product design, credit assessment, and continuity planning — can be rewired to operate under conditions of deep uncertainty and irreversible change. Those that succeed will not eliminate climate risk (that’s impossible). They will internalise it early, adapt faster, and preserve optionality as the transition unfolds. Those that do not may find themselves where many firms were in the early 2010s—surprised by risks that were already visible, and outperformed by competitors who prepared earlier.

Sources

1. Sandy Tech – Business Unusual
2. Breaking the Tragedy of the Horizon – Speech by Mark Carney
3. Guide to Climate Scenario Analysis for Central Banks and Supervisors (NGFS – 2025 Update, PDF)
4. Climate Analysis Likely Understates Risk, Say FSB and NGFS – Central Banking
5. Climate Risk Applications: Guidance and Practices (UNEP FI – From Disclosure to Action)
6. Global ESG Standards & Climate Risk Alignment – Council Fire Guide
7. U.S. Banks’ Exposures to Climate Transition Risks (SSRN Working Paper)
8. U.S. Banks’ Exposures to Climate Transition Risks (New York Fed Staff Report)
9. Enhancing Banks’ and Insurers’ Approaches to Managing Climate‑Related Risks – BCLP
10. Divestment and Engagement: The Effect of Green Investors on Corporate Carbon Emissions – Harvard Law School Forum
11. Greening Brown Sectors Through Transition Finance – SMU Centre for Climate Finance & Investment
12. IMPACT+ Principles for Climate‑Aligned Finance (Climate Alignment Initiative / RMI, PDF)