Climate Risk to Banking: 2025 Report

The Escalating Economic Costs of Delaying Climate transition

delaying the transition to a greener economy isn’t just an environmental concern; it’s a rapidly growing economic threat. A recent report highlighted that postponing climate action will substantially increase overall economic costs, resulting in meaningful gdp losses and disruptions to global supply chains. Immediate and decisive action is crucial to mitigate these risks and ensure long-term financial stability.

understanding the Financial Risks of Climate Inaction

The Network for Greening the Financial System (ngfs) released a groundbreaking report assessing the near-term impacts of climate policies and climate change on financial stability and economic resilience. This analysis serves as a critical input for climate stress-testing and evaluating risks to financial institutions’ investment portfolios. The core finding is stark: procrastination is far more expensive than proactive engagement.

Did You Know? The 2023 report by the Intergovernmental Panel on Climate Change (ipcc) emphasized that global warming is unequivocally influenced by human activities, with widespread and rapid changes occurring in the atmosphere, ocean, cryosphere, and biosphere.

Scenario Analysis: Immediate Action vs. Policy Stagnation

The ngfs report employs various scenarios,ranging from immediate and robust climate action to a state of policy stagnation.The results consistently show that immediate action to curb climate change incurs the lowest impact on financial systems. Conversely, delayed action leads to escalating costs and more severe economic consequences.

Consider the example of coastal cities. Investing in seawalls and climate-resilient infrastructure now is significantly cheaper than dealing with the catastrophic damage caused by increasingly frequent and severe flooding in the future, as seen in recent events in miami and venice.

The Gem-e3 Model: A Tool for Informed Decision-Making

Ricardo’s gem-e3 model played a central role in developing this report.This award-winning, global environmental and strategic consultancy used the gem-e3 model to evaluate climate change and energy demand variables against macroeconomic data, including gdp, productivity, and population. This comprehensive analysis generates detailed scenario outcomes, enabling policymakers and financial institutions to make informed decisions.

Additional modeling from Climate Finance Alpha and the International Institute for Applied Systems Analysis further refined the scenarios produced through the gem-e3 model, ensuring a robust and multifaceted assessment.

Pro Tip: Financial institutions can leverage scenario analysis tools like gem-e3 to stress-test their investment portfolios against various climate scenarios.This allows them to identify vulnerabilities and proactively adjust their strategies to mitigate risks.

Key Variables Assessed by the Gem-e3 Model

The gem-e3 model provides critical insights into the interplay between the economy, the environment, and the energy system. Its comprehensive analysis allows decision-makers to compare policy scenarios based on the performance of firms, household consumption patterns, goverment spending, and international trade.

Organizations seeking investment can leverage this analysis to gain a better understanding of potential climate risks and the expectations likely to be placed upon them by institutional investors. Clarity and proactive risk management are increasingly vital for attracting lasting investment.

Expert Perspectives on the Short-Term Climate Scenarios

According to Ricardo’s Director of Energy and Economic Modelling, leonidas Paroussos, “The development of these scenarios provides, for the first time, short-term impacts of key climate response scenarios. It will be an invaluable tool for decision makers and creates an industry standard for financial institutions and the private sector.”

Sabine Mauderer, Chair of the ngfs and First Deputy Governor of the Deutsche Bundesbank, emphasized that the new ngfs short-term climate scenarios are a milestone in enhancing our understanding of climate-related risks. “Extreme weather events and abrupt changes in transition policies can significantly affect our economies and financial sectors in the short run. The results remind us that reducing or delaying climate action will likely worsen future economic damages.”

Livio stracca, chair of the ngfs workstream and Deputy Director General Financial Stability at the European Central Bank, added, “The ngfs short-term scenarios represent a key addition to the analytical toolkit for understanding climate-related macroeconomic and financial risks.This new set of scenarios helps to describe the more immediate impacts of climate shocks and policy shifts,in a timeframe and level of detail that is especially relevant for investment decisions,financial supervision,monetary policy,and risk management.”

The Impact of Delaying Climate Action: A Detailed Breakdown

To illustrate the potential financial impact, consider these key areas:

• gdp Losses: Delays in climate action lead to more significant gdp reductions due to increased climate-related disasters and the need for more drastic and costly interventions later on.
• Supply Chain Disruptions: Extreme weather events, such as droughts and floods, can severely disrupt agricultural production and manufacturing, leading to supply chain bottlenecks and increased costs.
• Financial Instability: Climate-related risks can destabilize financial markets as assets exposed to climate risks lose value, perhaps triggering systemic crises.
• Labor market Impacts: Transitioning to a green economy requires workforce retraining and adjustments. Delays can lead to job losses in carbon-intensive industries without adequate planning for new green jobs.

Comparative analysis of Climate Action Scenarios

Scenario	Description	Impact on financial Systems	Economic Costs
Immediate Action	Swift and decisive policies implemented to reduce emissions and transition to a green economy.	Lowest impact; allows for gradual adjustments and reduces long-term risks.	Lower overall costs due to proactive measures and reduced disaster recovery needs.
Delayed Action	Policies are implemented later and are less aggressive, leading to higher emissions and increased climate-related risks.	higher impact; increased likelihood of financial instability due to abrupt policy changes and climate shocks.	Significantly higher costs due to more severe climate impacts and the need for more expensive interventions.
Policy Stagnation	Little to no action is taken to address climate change, resulting in continued increases in emissions and global warming.	Highest impact; severe financial instability and potential systemic crises due to catastrophic climate events.	Catastrophic; massive gdp losses, widespread infrastructure damage, and significant social disruption.

Case Studies: Real-World Examples of Climate Impact

The increasing frequency and intensity of hurricanes in the gulf coast region of the united states provide a stark example of the economic toll of climate change. The costs associated with damage repair, business interruption, and displacement of residents are significant and growing.

Similarly, the prolonged droughts in california have led to significant agricultural losses and increased water scarcity, impacting the state’s economy and highlighting the vulnerability of key sectors to climate change.

Future Trends in Climate Risk Management

The ngfs report underscores several key trends in climate risk management:

• Increased Regulatory Scrutiny: Central banks and financial supervisors are increasingly focused on assessing and mitigating climate-related risks in the financial system.
• growing Investor Pressure: Institutional investors are demanding greater transparency and action on climate change from the companies they invest in.
• Innovation in Climate Finance: New financial products and services are being developed to support the transition to a green economy, such as green bonds and climate insurance.

Did You Know? Green bonds, used to finance environmentally friendly projects, saw a record issuance of over $500 billion in 2021, indicating a growing investor appetite for sustainable investments.

The Role of Central Banks and Financial Institutions

Central banks and financial institutions play a crucial role in managing climate-related risks. They can:

• Incorporate climate risks into their supervisory frameworks.
• Stress-test financial institutions’ portfolios against climate scenarios.
• Promote the development of green financial products and services.
• Engage with companies to encourage better climate risk management practices.

How prepared is your local community for climate-related disasters? What steps can individuals take to promote climate-conscious investing?

Faq Section: Understanding Climate Transition and Economic Risks

What are the key findings of the ngfs report?

The report highlights that delaying climate action will increase overall economic costs, generate material gdp losses, and result in impacts to global supply chains. Immediate action is more cost-effective.

What is the gem-e3 model?

Gem-e3 is a state-of-the-art, large-scale, multi-regional, multi-sectoral model that provides details on the economy and its interaction with the environment and the energy system. It is indeed used to assess the impact of climate policies and climate change on macroeconomic variables.

How can financial institutions use the ngfs short-term scenarios?

financial institutions can use the scenarios to stress-test their investment portfolios against various climate scenarios, identify vulnerabilities, and proactively adjust their strategies to mitigate risks.

What are the main economic risks associated with delaying climate action?

The main risks include gdp losses, supply chain disruptions, financial instability, and negative impacts on labor markets.

What role do central banks play in managing climate-related risks?

Central banks can incorporate climate risks into their supervisory frameworks, stress-test financial institutions’ portfolios, promote green financial products, and engage with companies to encourage better climate risk management.

Given the context, what are the potential long-term economic impacts of a delayed response to climate change, considering the insights from the GEM-E3 model and the NGFS report?

The Economic climate: An Interview with Dr. Aris Thorne on the costs of Delay

Welcome to Archyde. Today, we have Dr. Aris Thorne, lead economist at Climate Finance Alpha, to discuss the escalating economic costs of delaying the climate transition. Dr. Thorne, thank you for joining us.

Dr. Thorne: Thank you for having me. It’s a pleasure.

Understanding the Immediate Financial Implications

Archyde: The Network for Greening the Financial System (NGFS) report paints a stark picture.Can you elaborate on the core message regarding the financial risks of not acting on climate change quickly?

Dr. Thorne: absolutely. The key takeaway is that delaying climate action is a significantly costlier path. The NGFS report underscores that immediate action, even with upfront investment, ultimately results in lower economic costs compared to continued inaction or slow, inadequate responses. We’re essentially looking at avoiding future disasters versus dealing with them later, and later is always more expensive.

Deconstructing the Gem-E3 Model

Archyde: The report heavily relies on the GEM-E3 model. Could you explain its role and how it is used to create these scenarios?

Dr. Thorne: Certainly. The GEM-E3 model is a sophisticated tool developed by Ricardo.It’s a global, multi-sectoral model that examines the interplay between the economy, the environment, and the energy system.It allows us to simulate various climate scenarios, from immediate action to policy stagnation, and assess their impact on macroeconomic indicators like GDP, productivity, and consumption. The model is crucial in building consensus around climate action as such a global effort depends on modelling different sectors to examine their impact on all the othre global sectors.

Key variables and Scenario Outcomes

Archyde: what are some of the critical variables the GEM-E3 model considers, and what are the general trends observed in the different scenarios?

dr. Thorne: The model looks at everything, including firm performance, household patterns, government spending, international trade and the shift to Green transition projects. Through all of this, the scenarios consistently show that immediate action has the lowest overall economic impact. Delayed action or policy stagnation leads to escalating costs, more severe disasters, supply shortages, and potential systemic financial breakdowns, with GDP losses looming from all scenarios.

Impact on Financial Institutions and Investors

Archyde: How can financial institutions use these scenarios to better manage their risk?

Dr. Thorne: Financial institutions can use these scenarios to stress-test their investment portfolios. By understanding the potential vulnerabilities of their assets under different climate scenarios, thay can proactively adjust their strategies. this could involve divesting from high-risk sectors, investing in climate-resilient infrastructure, or supporting green projects. This sort of scenario building helps them assess their risk exposure and reduce it through diversification or re-evaluation.

Real-World Examples and Case Studies

Archyde: Can you provide some real-world examples illustrating the economic impact of climate change delay?

Dr. Thorne: Certainly. The increasing intensity of hurricanes along the U.S. gulf Coast is a prime example. The costs associated with damage repair, business interruption, and displacement are substantial and growing. Similarly, the droughts in California have led to meaningful agricultural losses and water scarcity, impacting many sectors within its economy. These are clear examples were delayed action is already imposing tangible costs.

The Role of Central Banks and Future Trends

Archyde: What role do central banks play, and what are the emerging trends in climate risk management?

dr. Thorne: Central banks are becoming increasingly involved. They can incorporate climate risks into their supervisory frameworks, stress-test financial institutions’ portfolios, promote green financial products, and engage with companies to encourage better practices. We’re also witnessing increased regulatory scrutiny, growing investor pressure for corporate action, and innovation in climate finance, such as the rise of green bonds.

The Future Outlook

Archyde: Considering all this, what should individuals and communities do to promote climate-conscious investing? What are some small steps we can employ for collective action?

Dr. Thorne: Individuals can inform themselves about climate risks in their investments and support companies with strong environmental practices. Communities can advocate for policies that promote renewable energy and lasting infrastructure. Small actions like reducing waste, supporting businesses committed to sustainability, and engaging in conversations about climate change can collectively create a significant impact and a shift in the mindsets of corporations and individuals.

Archyde: Dr. Thorne, thank you for your insights. It’s clear that the economic costs of delaying climate action are rapidly escalating, and immediate action is crucial. We appreciate your time.

Dr. Thorne: Thank you for having me.

We encourage our readers to share their thoughts and perspectives in the comments below. How can we accelerate the transition to a greener economy in your community?