Mapping global financial risks under climate change

Abstract

There is growing concern about the potential impacts of climate change on financial stability but little quantitative evidence available on the potential magnitude of financial risks induced by climate extremes. Here we provide a forward-looking assessment of the impacts of floods, storms, and wildfires on a universe of securities representative of global market capitalization, using the structural climate credit-risk model CLIMACRED-PHYS. We show that there can be a substantial amplification of direct economic losses arising from firms’ financial leverage. We 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. Finally, we quantify the potential increase of financial risks induced by climate change. Overall, our 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. Climate change will impact financial stability, but the quantitative evidence on the magnitude of such risks is still rare. With a forward-looking structural credit-risk model, researchers map how physical risks can be amplified through financial leverage and generate cross-border climate risks.