Financing the Transition to a Sustainable Future

The threats posed by climate change and environmental degradation are daunting, but the financial sector has a pivotal role to play in funding the transition to a more sustainable future. As consumers, investors, regulators and litigators intensify scrutiny, banks must adapt strategies to drive positive change and mitigate growing climate-related legal risks.

Enhancing Climate Risk Modeling

Accurately assessing climate risks is crucial for informed lending decisions that protect portfolios from devaluation of carbon-intensive assets. Legacy financial models often fail to capture the full scale and complexity of climate impacts due to simplifying assumptions. Banks must develop more holistic approaches accounting for cascading risks beyond just direct physical threats.

Photo by Louis Droege on Unsplash

Leading banks globally are in an "arms race" to build sophisticated climate risk models aligned with the latest science. Quantifying risks like climate migration stand to make better capital allocation decisions. However, challenges remain around impacts like industries facing decarbonization hurdles.