Climate Change: Managing a New Financial Risk

John T Colas, Ilya Khaykin and Alban Pyanet

As scientists continue to reinforce the severity of climate change, the potential disruption and financial implications have come to the fore. The bankruptcy of the Pacific Gas and Electric Company (a major Californian utility), dubbed “the first climate-change bankruptcy” by The Wall Street Journal (Gold 2019), was the most recent example at the time of writing. Banks cannot afford to ignore this global issue.

The impact of climate change will prompt substantial structural adjustments to the global economy. Several sectors, such as coal and steel, are expected to experience significant disruption, while others such as renewables, carbon capture and adaptation technologies are likely to benefit. Such fundamental changes will inevitably affect the balance sheet and the operations of banks, leading to both risks and opportunities. While mortgage portfolios in coastal areas may be exposed to the physical impact of climate change (rising sea levels and flooding), massive amounts of capital and new financial products will be required to fund the transition to finance climate resilience, creating demand for bank services. Meanwhile, regulators are beginning to act, and investors

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