Climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy. Climate change is already impacting or is anticipated to impact nearly every facet of the economy, including infrastructure, agriculture, residential and commercial property, as well as human health and labor productivity. Over time, if significant action is not taken to check rising global average temperatures, climate change impacts could impair the productive capacity of the economy and undermine its ability to generate employment, income, and opportunity. Even under optimistic emissions- reduction scenarios, the United States, along with countries around the world, will have to continue to cope with some measure of climate change-related impacts.
This reality poses complex risks for the U.S. financial system. Risks include disorderly price adjustments in various asset classes, with possible spillovers into different parts of the financial system, as well as potential disruption of the proper functioning of financial markets. In addition, the process of combating climate change itself—which demands a large-scale transition to a net-zero emissions economy—will pose risks to the financial system if markets and market participants prove unable to adapt to rapid changes in policy, technology, and consumer preferences. Financial system stress, in turn, may further exacerbate disruptions in economic activity, for example, by limiting the availability of credit or reducing access to certain financial products, such as hedging instruments and insurance.
A major concern for regulators is what we don’t know. While understanding about particular kinds of climate risk is advancing quickly, understanding about how different types of climate risk could interact remains in an incipient stage. Physical and transition risks may well unfold in parallel, compounding the challenge. Climate risks may also exacerbate financial system vulnerabilities that have little to do with climate change, such as historically high levels of corporate leverage. This is particularly concerning in the short- and medium-term, as the COVID 19 pandemic is likely to leave behind stressed balance sheets, strained government budgets, and depleted household wealth, which, taken together, undermine the resilience of the financial system to future shocks.
A report commissioned by federal regulators overseeing the nation’s commodities markets has concluded that climate change threatens U.S. financial markets, as the costs of wildfires, storms, droughts and floods spread through insurance and mortgage markets, pension funds and other financial institutions. Riskthinking helps decision-makers better understand the climate-related financial risks they face and respond accordingly.
Climate change has consequences for food production worldwide, both in terms of crop yields and food prices. In the worst-case climate scenario of a 4°C warming, an extra 55 million people would be forced to endure hunger – a 45% increase compared to the situation without climate change- with the global South hit the hardest. Protectionist trade policies under this scenario could increase this number to as many as 73 million adversely impacted, whereas the elimination of trade barriers could reduce the number of people impacted to 20 million people.
A study published by global consultancy group KPMG found that most businesses are still without a clear climate change plan, despite an increase in ESG pressures from investors and other stakeholders. Riskthinking.ai’s patented scenario generation platform and analytics helps business leaders plan for future climate risk.
Mass loss from 2007 to 2017 due to melt-water and crumbling ice aligned almost perfectly with the Intergovernmental Panel for Climate Change’s (IPCC) most extreme forecasts, which see the two ice sheets adding up to 40 centimetres (nearly 16 inches) to global oceans by 2100, they reported in Nature Climate Change. Such an increase would have a devastating impact worldwide, increasing the destructive power of storm surges and exposing coastal regions home to hundreds of millions of people to repeated and severe flooding.
The National Coastal Property Model (NCPM) simulates flood damages resulting from sea level rise and storm surge along the contiguous U.S. coastline. The model also projects local-level investments in a set of adaptation measures under the assumption that these measures will be adopted when benefits exceed the costs over a 30-year period. However, it has been observed that individuals and communities often underinvest in adaptive measures relative to standard cost-benefit assumptions due to financial, psychological, sociopolitical, and technological factors. Riskthinking.ai’s forward-looking scenarios can help individuals and communities better understand- and avoid – the costs of sub-optimal flood risk reduction behavior.
Although this article is a year old, the information is still highly relevant: Climate scenarios provide a consistent set of possible future conditions to inform analyses of the risks posed by climate change. They are invaluable tools for making decisions in the face of radical uncertainty, particularly when they are underpinned by Structured Expert Judgement (SEJ), artificial intelligence (AI) and machine learning (ML) as are Riskthinking.AI’s.
Earlier this summer, the Summit supercomputer at Oak Ridge National Lab in Tennessee set about crunching data on more than 40,000 genes from 17,000 genetic samples in an effort to better understand Covid-19. Summit is the second-fastest computer in the world, but the process — which involved analyzing 2.5 billion genetic combinations — still took more than a week.