Most investors aren’t paying attention to climate risks – the financial system needs to change

Climate change is increasing the frequency of extreme weather events. For example, extreme sea-level events, where large storm surges and high tides temporarily push the sea much higher than normal, currently occur once a century. However, they are projected to strike coastal areas every decade, if not yearly, by 2040.

Events like these have significant consequences for the global financial system, such as depressing economic growth. According to research, a once-in-a-hundred year cyclone is linked to an average income loss across all countries of nearly 15% per person, surpassing the 9% average income reduction typically observed in the aftermath of a financial crisis.

The extensive damage that extreme weather inflicts on infrastructure, homes and the economy could also lead to debt that a country may struggle to repay, potentially making it harder for it to borrow money in the future. Research I carried out with colleagues found that, by 2030, climate change should result in 59 countries seeing a deterioration in their ability to repay their debts, and a subsequent increase in their cost of borrowing.

 
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