Mapping Global Financial Risks Under Climate Change

There is a growing concern about the potential impacts of climate change on financial stability but little quantitative evidence is available on the potential magnitude of financial risks induced by climate extremes. An accurate assessment of climate physical risk is fundamental for global financial risk management. 

In a new journal article published in Nature Climate Change, Antoine Mandel, Stefano Battiston and Irene Monasterolo provide a forward-looking assessment of the impacts of floods, storms and wildfires on a universe of securities representative of global market capitalization, using a structural climate credit-risk model. 

The authors find that there can be a substantial amplification of direct economic losses arising from firms’ financial leverage. They also highlight the importance of cross-border climate financial risks, notably the transfer of impacts from production facilities in emerging economies to firms in developed economies.

The results have implications for the design and implementation of measures aimed at reducing climate-induced physical risk. 

Policy recommendations:

• Climate risks should be assessed at the asset level to identify the most exposed assets and to factor in potential financial losses in the design of adaptation strategies.
• Financial risk could be decreased through policies aimed at limiting the financial leverage of firms that are most exposed to climate risks.

Overall, the results emphasize the relevance of asset-level climate risk assessment for financial regulation and the importance of integrating financial impacts in the assessment of adaptation policies.