Climate-related physical risks and the financial sector

Celso Brunetti, Benjamin Dennis, Gurubala Kotta and Caroline Conley Norris

Chapter 5 in Handbook of Climate Change and Financial Markets, 2026, pp 74-94 from Edward Elgar Publishing

Abstract: The first wave of empirical literature on the links between climate-related physical risks and the financial sector has often found little impact or ambiguous results. There are several reasons why the historical record may not carry over into the future. First, the scale, frequency, and correlation of physical hazards—which we characterize as an integrated ‘syndrome’—are rising as the global climate system reacts to greenhouse gas concentrations. This can be seen in models predicting the frequency of hurricanes, for example. Second, the robust protective layers that have benefited the financial system—including insurance and public backstops—may be constrained going forward. Already, we are seeing a pullback of insurance from markets with emerging climate risk, and as the need for spending on adaptation and recovery increases with the expansion of climate damage, governments may need to make hard choices about further spending. Finally, the concurrent migration of businesses and households toward climate-vulnerable areas in some contexts and away in others has scrambled the share of assets that are at risk. This chapter emphasizes the importance of assessing forward-looking risks to the financial system in these three areas.

Keywords: Financial Risk; Climate Change; Natural Hazards (search for similar items in EconPapers)
Date: 2026
ISBN: 9781035340415
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