The Impact of Climate Risks on the Insurance and Banking Industries

It is now largely recognised that the global climate has changed since the pre-industrial period. While the role of financial institutions in the transition to a low-carbon economy has received increasing attention over time, more limited has been the evidence on how climate change might affect financial institutions’ balance sheets. This chapter aims to redress this paucity of evidence by examining the impact of climate risks on the banking and insurance industries. To this purpose, it presents the main channels through which the physical, transition and liability risks of climate change might translate into financial risks for banks and insurance companies, along with the key data available to date. The extent to which climate risks might impair financial stability while causing new market failures is also discussed.