New research from Dr Bernard Njindan Iyke has examined how climate change is creating financial risks for investors, lenders and financial institutions.
“Climate change has become a financial risk,” he says. “This is because physical hazards and the transition to a low-carbon economy affect cash flows, collateral values, borrowing costs and asset prices.”
Dr Iyke’s research examines two major forms of climate-related financial risk: the physical impacts of climate change, such as floods, heatwaves and other extreme weather, and the risks associated with the transition to a low-carbon economy, including changes in policy, technology and consumer preferences.
The study, published in the Journal of Climate Finance, reviewed how markets measure and reflect these risks, as well as their implications for financial stability.
“The problem is not simply whether climate risk matters, but whether financial markets can measure and price it accurately enough to allocate capital and manage risk,” he says.
The study found that climate-related risks can have significant financial effects across several types of assets, although their impact varies depending on how exposure is measured, the market and the period examined.
Dr Iyke says investors, lenders and regulators should not treat all measures of climate risk as interchangeable.
“A measure based on emissions, physical hazards, news coverage or a stress-test scenario captures a different source of exposure and can lead to different conclusions about valuation and vulnerability.”
“For investors, this affects portfolio decisions and required returns. For banks and insurers, it affects credit assessment, underwriting and concentration risk. For supervisors, it affects scenario design and stress testing.”
Dr Iyke’s next step is to improve climate-risk measurement by linking environmental science more closely with firm and financial data.
