Climate change poses an unprecedented set of challenges to the global economy and by extension to the financial sector. Macroeconomic impacts caused by climate change may create significant credit, market, and operational risks for financial institutions.

During the transition to net-zero, policy, technology, and market shifts can create headwinds for clients. Over that same time, physical hazards will increase in frequency and severity, raising costs and potentially disrupting supply chains. Effective preparation requires financial institutions to understand the potential macroeconomic implications of transition and physical risks. Many firms are beginning to explore the integration of macroeconomic impacts into climate scenario analysis in order to fully assess the implications for the financial sector.

Climate-related risks are too often considered long-term risks by financial actors.

However, near-term impacts are becoming ever harder to ignore. This can be observed with the worsening of extreme weather events around the world and their attendant economic losses. The interconnectedness of the global economy means climate-related impacts in one area can have ramifications across the world. Near-term transition risks can also create systemic instability as many incumbent industries, such as fossil fuels, will face existential changes. New climate policies and shifting consumer preferences have the potential to rapidly upend current business models.