Climate change is a source of financial risk

Glenn D Rudebusch

Climate change describes the trend toward higher average global surface temperatures and the accompanying environmental shifts, such as rising sea levels and more severe storms, floods, droughts and heatwaves. Climate change will have sweeping effects on all aspects of human society, including the economy and the financial sector. The ongoing trend of climate change – including higher temperatures and more extreme weather – will result in economic and financial losses for many businesses, households, and governments. Moreover, the uncertainty about the severity and timing of these losses is a source of financial risk. Climate-related shifts in the physical environment can slow economic growth and increase the likelihood of disruptions and reductions in output, employment and business profitability. Furthermore, the substantial economic transformation required to mitigate and adapt to climate change may lower the value of certain business and household assets in the not-too-distant future.

This chapter will describe how uncertainty about the magnitude, scope and timing of the economic damages from climate change translates into financial risk, which can adversely affect

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