Climate and Nature Financial Risk
The Global Risks Alliance (GRA)
Climate and nature risks start in the real economy, as damaged assets, disrupted supply chains, changing policies and degraded ecosystems, and reach the financial system through identifiable channels. This page shows how those channels work in insurance, banking and investment, how they interact and how stress can feed back from finance into the real economy, for example when cover or credit is withdrawn.
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Risk transmission in Climate and Nature Financial Risk is the path by which physical, transition, technology and systemic shocks reach the sector and travel onward through balance sheets, markets and the real economy. Analysis uses aggregated, sector-level indicators such as loan exposure to high physical risk areas and collateral in flood zones; it assesses no individual firm and is not investment advice.
Fig.How GCRI, GRF and GRA share one field while the authorities decide. Design, not a record.
The working screen behind this subject: its structure, terms and states. Names are placeholders and values illustrative.
Damage and disruption become insurance claims, loan defaults and revaluations of property and firms.
Shifts in carbon prices, regulation, technology and demand alter the value of assets and liabilities.
Loss of water, soil, pollination or coastal protection raises costs and reduces revenues for dependent sectors.
| Sector | First channel | Second-round channel |
|---|---|---|
| Insurance | Claims and reserve strengthening | Repricing and withdrawal of cover |
| Banking | Collateral value and borrower income | Credit tightening in exposed regions |
| Investment | Repricing of exposed issuers | Redemptions and forced sales |
Where hazard rises faster than adaptation, cover becomes unaffordable or unavailable, and risk moves to lenders, owners and the state. Topic depth at adaptation and insurability; adaptation institutions at GRF adaptation institutions.
When insurance becomes unaffordable or unavailable, mortgaged properties may lose value and credit risk rises. See Adaptation and insurability.
Exposures clustered in exposed regions or sectors mean many institutions are hit by the same event or policy.
Sudden reassessment of risk can reprice securities across portfolios at once.
Catastrophe risk passed to reinsurers and investors links local events to global markets, a subject of Reinsurance and Catastrophe.
Disasters strain public finances, affecting sovereign debt and the institutions that hold it; see Disaster Risk Finance.
Withdrawal of insurance or credit from exposed areas can reduce investment, lower property values and slow recovery, which in turn worsens physical vulnerability. Adaptation and risk reduction can break this loop. Institutional responses are convened at The Global Risks Forum (GRF), in Climate and Nature Governance, and a Nexus Universe theme for this field is physical and transition risk in one scenario; see test in Nexus Universe.
Transmission analysis uses aggregated data and published research. It does not assess individual firms, recommend transactions or constitute advice. Methods draw on scenario design and stress testing and financial economics and macro-finance, and every scenario carries its assumptions.
Any discussion among firms takes place under GRA's competition safeguards, set out in a written competition policy that counsel reviews before membership opens: no exchange of prices, underwriting terms, positions or strategies, and data from firms only in aggregated form.
Each term as this page uses it. Where a standard-setting body defines the term, the wording follows that body.
| Term | Definition |
|---|---|
| Transmission channel | The route by which a shock reaches financial institutions' balance sheets. |
| Contagion | Transmission of losses or stress from one institution or market to others. |
| Second-round effects | Feedback from bank losses to the economy, such as tighter credit deepening a downturn. |
| Common exposure | Holdings of the same or similar assets by several institutions, which makes their losses move together. |
The bodies and documents this page is read against. Status and editions change; each link goes to the issuing body.
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