Jun 5, 2024 5 min read

Climate causes and consequences

History tells us that the cause of recession is more important than the consequences when assessing bank risk. So what might trigger a future climate-related recession and how does this impact the banks?

AI-generated via DALL-E

Consider climate change, both its causes and potential consequences. On balance, is the phenomenon a positive or negative for banks?

I can almost hear the laptops being thrown against the wall. “You’re crazy Dr. Hughes – assuming you are a real doctor! Of course global warming is a bad thing! And banks are on the front line!”

But I do think global warming is a mild positive for banks. My argument is largely based on circumstantial evidence: why would a banker seeing the obvious consequences of global warming not take it more seriously? If managing climate risks might quell credit losses and boost profits, why would a rational banker instead prefer to do nothing?

I was reminded of this question when I saw reports this week that the European Central Bank (ECB) is about to issue fines to several banks for not taking the requirement to assess climate risks seriously enough. This implies that not only are these banks indifferent to supposed climate risks to their own profits, they are also willing to flout regulatory rules on the matter and pay fines. Then there are the reputational consequences, which could be considerable.