What Is Climate Risk In Finance

What Is Climate Risk In Finance?

Climate risk is a potential financial loss caused by the impacts of climate change. It is a growing concern for investors due to its potential to disrupt the global economy and cause financial losses. Climate risk can affect a variety of areas, including investments, banking, insurance, and other financial services.

Types of Climate Risk

Climate risk can be broken down into two main categories: physical risk and transition risk. Physical risk can be defined as the risk of a direct physical impact from climate change, such as flooding, extreme weather events, and sea level rise. Transition risk is the risk of a financial or economic impact from the transition to a low-carbon economy. This could be the result of changes in government regulations, the shift to renewable energy sources, or the introduction of a carbon price.

The Risks to Investors

Climate risk presents significant risks for investors. It can affect investments in a variety of ways, such as making certain investments less attractive, increasing the cost of capital, or reducing the value of assets. It can also lead to financial losses due to the potential for physical damage to assets and liabilities.

Managing Climate Risk

Financial institutions and investors must be aware of the potential risks posed by climate change and take steps to mitigate them. This can be done through improved risk management and assessment, as well as investing in more sustainable assets such as renewable energy or low-carbon technologies. Additionally, investors should consider the potential long-term impacts of climate change and factor them into their investment decisions.


Climate risk is a major concern for investors, and it is important for them to be aware of the risks posed by climate change. Through improved risk management and assessment, as well as investments in more sustainable assets, investors can reduce their exposure to climate risk and protect their investments from potential losses.