Embedding climate change in financial metrics

Natalie Ambrosio Preudhomme, James Edwards, Juan Licari and Olcay Ozkanoglu

Climate change has emerged as a key and increasingly material risk factor in financial decision-making. As extreme temperature records break one after another, and increasingly devastating storms and wildfires are experienced around the globe, awareness is growing that investments and loans are exposed to climate risk based on the exposure of underlying physical assets. Likewise, as nations announce net zero commitments and companies sign on to ambitious pledges, consumer sentiment around greenhouse gas (GHG) emissions is shifting, and demand is growing for governments to finance the transition to a low carbon economy. Supervisory expectations are also changing, with nations around the world recommending a new generation of financial reporting in line with the Task Force on Climate-related Financial Disclosures (TCFD). Several countries, including New Zealand and the UK, are moving towards mandatory climate risk disclosure, and central banks such as the Bank of England are requiring climate stress tests for banks and insurers. The acknowledgement of climate risk as a systemic financial risk is here, and it calls for the development of metrics to quantify risk exposure and inform