Why claiming a climate financial crisis is just round the corner makes for bad policy

If you consider just the immediate impacts of physical climate risk on banks, you will find evidence that it hurts them.  There is no doubt that rising temperatures cause more extreme weather and that the subsequent damage to households and businesses is bad news for bank loan books.  It is reasonable to believe that bank losses will increase – perhaps precipitously – as the world continues to warm.

But this is not the end of the story.  If it were, financial industry profits would dip after every climate-related catastrophe, and at least some banks would have fallen into insolvency by now.  In reality, although banks might lose out a bit amidst a disaster, they invariably cover their losses – and then some – by financing the rebuild.

A similar story can be told about transition risk.  As legislation is enacted to curtail emissions (sunsetting the sale of gas-powered autos being a good example), companies that rely heavily on fossil fuels will face challenges and some will fail – inflicting credit losses on their lenders.  However, these same banks will also profitably finance the new, low-emission companies that rise to replace them.

Current data bears this out. Despite a ratcheting up of climate hazards and an acceleration of government action on emissions (an effort that remains underwhelming), we find no evidence of any climate-related stress on the global banking system.