This report offers detailed recommendations to guide the banking industry in fully measuring, analyzing, and acting against threats posed by the physical risks of climate change. It sets out a practical roadmap to help banks conduct risk assessments and incorporate climate risks into their day-to-day decision-making.
Financing a Net Zero Economy: The Consequences of Physical Climate Risk for Banks was developed out of an illustrative analysis conducted by Ceres and CLIMAFIN that used natural catastrophe and credit risk models adjusted for climate effects, downscaled macro-economic data, and publicly available syndicated loan information for major U.S. banks.
The report analyzes $2.2 trillion of exposure for syndicated loans. It finds that the annual value-at-risk from physical climate impacts on just the syndicated loan portfolios of major U.S. banks could approach 10 percent, and that two-thirds of banks’ physical risk comes from the indirect economic impacts of climate change, such as supply chain disruptions and lower productivity, with coastal flooding (driven by sea level rise and stronger storms) representing the largest source of direct risk.
Recommendations are detailed across across four broad categories:
ASSESS AND MEASURE CLIMATE RISK
Assess all elements of climate risk and opportunity
Measure the current impact of natural disasters on the value of financial assets
Project the future cost of climate change
Perform climate stress tests
Collect asset-level data about exposure and loss vulnerability
TAKE ACTION
Build connections with external experts
Integrate climate into product and service pricing
Engage clients on physical risks
CAPITALIZE ON OPPORTUNITIES
Understand the changing insurance landscape
Focus on adaptation projects to mitigate credit risk
Develop innovative adaptation financing solutions
Advocate for smart financial regulatory and policy actions on adaptation
MEET THE MOMENT
Set and disclose financing portfolio targets
Publicly commit to and begin work on the 13 recommendations above within the next year