The underpricing of climate damages in the financial system
Climate change is no longer a distant threat— it’s a present and intensifying risk to the global financial system. Earlier this year CICERO Center for International Climate Research and Carbon Tracker engaged with financial stakeholders on the underpricing of climate damages in the financial system.
The impacts of climate change are global, compounding, and cascading. From droughts and extreme heat to water stress and food system disruptions, the risks are mounting.
And yet, traditional climate risk models used to assess economic damages associated with global temperature rises remain reliant on outdated assumptions, often underestimating acute risks, and non-linear systemic threats such as the breaching of climate tipping points.
From the discussion at the roundtable with experts, scientists, and financial practitioners, we have extracted the following key points:
1. Climate risk poses a systemic risk to the financial system.
2. Current economic models underestimate climate damages, especially physical risks.
3. Pension funds and financial institutions lack adequate tools to assess climate risk accurately.
4. Scenario analysis is flawed, missing key transmission channels and long-term impacts.
5. Investors must shift focus from short-term returns to long-term resilience and decarbonisation.
6. Policymakers play a key role in setting clear policy frameworks and climate targets that guide investment decisions and align with the net zero transition.
Read the full note here. Please contact us if you have questions, input or ideas for collaboration!
