Climate risk as a strategic blind spot

👉 Are we using the wrong tools to assess climate risk? A new expert-led assessment, drawing on the judgment of 60+ climate scientists, says that #climatechange introduces forms of risk that exceed the design assumptions of existing economic and financial frameworks. Here’s what that means in practice ⬇️ 🔹 Climate damages are structural, they reshape economies: where people live, what can be produced, how infrastructure functions, and which regions remain viable. 🔹 Extremes drive real-world risk: what actually destabilises societies and markets are heatwaves, floods, droughts, grid failures, food shocks. It’s the tails of the distribution that matter. 🔹 GDP misses mortality, inequality, displacement, ecosystem loss, and can even rise after disasters due to reconstruction. This creates a dangerous illusion of resilience. 🔹 Repeated shocks erode recovery capacity and propagate across supply chains, finance, migration, and geopolitics. 🔹 Beyond ~2°C, uncertainty widens sharply. Confidence in precise damage estimates falls even as consequences grow. 🔹 Tipping points expose the limits of economic modelling: At higher warming levels, model outputs can appear precise while resting on assumptions that no longer hold. At the same time, many models also underestimate positive tipping points in clean energy and innovation. The goal is to build resilience under deep uncertainty. For treasuries, central banks, regulators, and long-horizon investors, this means recalibrating governance toward: ➡️ precaution ➡️ robustness ➡️ transparency Because avoiding irreversible outcomes is always cheaper than trying to price them after the fact. read the report "Recalibrating Climate Risk" here 👇 https://lnkd.in/dx8wmRZ4 Green Futures Solutions (University of Exeter) Carbon Tracker @aurora trust

Climate Risk = Business Risk 🌍 As climate impacts intensify, the connection between environmental risk and business risk is becoming more direct and more difficult to ignore. These risks are no longer theoretical. They are affecting assets, operations, and financial planning across industries and regions. Severe weather events such as storms and floods are damaging infrastructure, halting operations, and increasing the costs of repair, insurance, and downtime. Heatwaves are lowering workforce productivity and raising the incidence of heat related health issues, particularly in sectors dependent on physical labor or lacking adequate climate control systems. Droughts are limiting access to essential inputs like water, disrupting industrial processes and increasing operational costs for water intensive sectors. Sea level rise is placing facilities, warehouses, and offices in coastal areas at risk of flooding, requiring significant investments in adaptation or relocation. Wildfires are interrupting transportation networks and regional supply chains, resulting in logistical delays, inventory disruptions, and increased delivery costs. Increased climate variability is making business planning more uncertain. Fluctuating weather patterns complicate forecasts, investment decisions, and long term strategy development. Energy infrastructure is also affected. Extreme temperatures and natural disasters are disrupting electricity and fuel supply, creating additional risks and increasing energy expenditures. Insurance markets are responding. Coverage in climate exposed areas is becoming more expensive or unavailable, leaving businesses with greater financial exposure and limited risk transfer options. These risks highlight the need for companies to integrate climate considerations into core decision making processes, from operations and procurement to finance and long term strategy. Addressing climate impacts is not a secondary issue. It is essential to maintaining competitiveness and resilience. #sustainability #sustainable #business #esg #risk

In the last six years, I've watched investors shift from seeing climate as a transition risk to confronting the reality in front of us: physical risk, hitting portfolios now. Chris Hall, editorial director of Sustainable Investor, captures this shift brilliantly in a new two-part piece, one of the clearest analyses I've read on where institutional investors are and where they need to go. $224bn in losses from natural disasters in 2025. Less than half are insured. And fewer than 1% of companies disclose capital expenditures for adaptation and resilience despite specific requirements under the CSRD and ISSB standards. Asset owners own the risk. What they don't have is decision-useful information: where the real exposures sit, what resilience actually costs, and who is genuinely prepared. And here’s the part that still gets missed. It’s not the flood that breaks a portfolio. It’s everything around it: no access, no power, no staff, no supply chain. Because this is no longer a one-off shock. It’s a cycle. Flood before Easter. Drought by June. Flood again in autumn. Then repeat. Global temperatures, energy imbalances and ocean heat absorption have set new records for 11 consecutive years (WMO). As UN Secretary-General António Guterres put it: “When history repeats itself 11 times, it is no longer a coincidence. It is a call to act.” This is locked into the calendar. The conversation has to move beyond measuring risk to building resilience. 👉 Adaptation Risks Push Asset Owners Beyond Traditional Boundaries Worth 10 minutes of your time. https://lnkd.in/eQ7aQ9cH #ClimateRisk #InstitutionalInvestors #Resilience #LongTermInvesting

Superb report published today from Green Futures Solutions (University of Exeter) on the inadequacy of current corporate and financial risk models in accommodating climate risks. At its most fundamental, I see the failure of these risk models as the core assumption that our systems of the future - whilst dynamic - will retain the same basic structures, functions and features as they do today. The assumption that our social, economic, and environmental reality will march onward into a flat, linear, tabula rasa which extends infinitely into the future. Tipping points science shows us that this isn't true. With increased temperatures and continued ecosystem degradation, tipping points will be reached, and system collapses will follow. And with system collapses come cascade failures, and often unforeseeable (and catastrophic) consequences. These consequences and radical uncertainties have to be - as far as they can be - factored into a new generation of risk governance approaches, fit for the future that lies before us. In the Ecologi | B Corp™ team, we're spending a lot of time thinking about risk management strategies as a core component of - and motivator for - corporate climate action. On our project assessments, we use sensitive risk models which take into account extreme climate scenarios and the significant uncertainty that comes with them - so that we can bake-in precaution, prevention and resilience from the start. Risk assessment and management has become a huge part of the work we do, both internally and for our clients. It's not lip service to say that climate risk management is business critical. Climate change impacts are arguably the most foundational, most all-encompassing of all risk factors affecting businesses today. And many current risk approaches in use by businesses and investors just aren't up to the task. Read the report 👉 https://lnkd.in/evipkQNX Good write-up in The Guardian 👉 https://lnkd.in/eXPeYjt5 📸 : John Towner via Unsplash

Climate change is reshaping business performance today ❗ Rio Tinto lost ~USD 800 million in revenue not from destroyed assets, but because cyclones stopped iron ore production and shipping. ❗ After Hurricane Harvey, US businesses suffered 20× more losses from lost revenue than from physical damage. ❗ Floods in Thailand disrupted electronics and auto supply chains so badly that the government warned buyers may “look elsewhere” due to reliability concerns. 👉 The pattern is clear, that real climate cost for businesses is business interruption, not repair bills. 🍃 This is where the opportunity emerges. In a world of frequent disruption, reliability becomes a competitive advantage. ✅ Companies that can keep operating, through diversified supply chains, resilient infrastructure, and better data, will win contracts, retain customers, and stabilise earnings while others fall behind. ✅ Climate resilience is following a familiar path: from cost → to necessity → to strategic edge. ➡️ The most important shift for leaders now is to move from managing climate risk to building operational advantage. #ClimateChange #BusinessStrategy #Resilience #SupplyChains #RiskManagement #SustainableFinance

𝙃𝙖𝙫𝙚 𝙮𝙤𝙪 𝙢𝙖𝙥𝙥𝙚𝙙 𝙮𝙤𝙪𝙧 𝙘𝙡𝙞𝙢𝙖𝙩𝙚 𝙧𝙞𝙨𝙠 𝙚𝙭𝙥𝙤𝙨𝙪𝙧𝙚? Most companies haven't. And I don't mean the direct risks – the flooding of your own facilities or heat stress on your workforce. I mean the hidden vulnerabilities within your supply chain. Here's what we know: extreme weather events are intensifying. At just 1.3°C of warming, the effects are clear: prolonged heatwaves, intensifying droughts, more frequent wildfires, and severe storms that bring heavier rainfall. These events have already caused thousands of deaths and displaced millions. But here's the part most boardrooms miss: you don't need to be in a flood zone to be flood-affected. Your Tier 2 supplier in South Asia might be. The agricultural inputs you depend on might come from regions experiencing consecutive crop failures. The transport routes you've used for decades might now face seasonal disruptions you haven't priced in. So what can you actually do? 𝗦𝘁𝗮𝗿𝘁 𝘄𝗶𝘁𝗵 𝗿𝗶𝘀𝗸 𝗺𝗮𝗽𝗽𝗶𝗻𝗴. Look beyond your own operations: 🔹 Where are your critical suppliers located, and what climate hazards are intensifying there? 🔹 Which materials or components have concentrated geographic sources? 🔹 What alternative routes, suppliers, or materials could build resilience? 𝗘𝗻𝗴𝗮𝗴𝗲 𝘆𝗼𝘂𝗿 𝘀𝘂𝗽𝗽𝗹𝘆 𝗰𝗵𝗮𝗶𝗻. Your suppliers are living these realities daily. Ask them what they're seeing, what's changing, what support they need. 𝗕𝘂𝗶𝗹𝗱 𝗮𝗱𝗮𝗽𝘁𝗮𝘁𝗶𝗼𝗻 𝗶𝗻𝘁𝗼 𝘀𝘁𝗿𝗮𝘁𝗲𝗴𝘆, not just ESG reports. This isn't about compliance – it's about business continuity. Climate adaptation needs finance, planning, and cross-functional ownership. The 𝟮𝟬𝟮𝟱 𝗪𝗼𝗿𝗹𝗱 𝗪𝗲𝗮𝘁𝗵𝗲𝗿 𝗔𝘁𝘁𝗿𝗶𝗯𝘂𝘁𝗶𝗼𝗻 𝗿𝗲𝗽𝗼𝗿𝘁 makes something else clear: these impacts fall hardest on those with the least protection. Communities facing poverty, fragile infrastructure, and limited services bear disproportionate burdens. Globally, #women carry an unequal burden, due to their underrepresentation in leadership and unpaid caring responsibilities. The data gaps mirror the protection gaps, especially in the Global South, where impacts are severe but monitoring and modeling remain under-resourced. And here's the critical point: 𝗮𝗱𝗮𝗽𝘁𝗮𝘁𝗶𝗼𝗻 𝗮𝗹𝗼𝗻𝗲 𝗶𝘀 𝗻𝗼𝘁 𝗲𝗻𝗼𝘂𝗴𝗵. Rapid emission reductions remain essential to avoid the worst impacts of climate change. We need both. 𝗖𝗹𝗶𝗺𝗮𝘁𝗲 𝗿𝗶𝘀𝗸 𝗶𝘀 𝗯𝘂𝘀𝗶𝗻𝗲𝘀𝘀 𝗿𝗶𝘀𝗸. And it's already here.

States and financial bodies using modelling that ignores shocks from extreme weather and climate tipping points, writes Damian Carrington. https://lnkd.in/et-3yWge Flawed economic models mean the accelerating impact of the #climatecrisis could lead to a global financial crash, experts warn. Recovery would be far harder than after the 2008 financial crash, they said, as “we can’t bail out the Earth like we did the banks”. As the world speeds towards 2C of global heating, the risks of extreme weather disasters and climate #tippingpoints are increasing fast. But current economic models used by governments and financial institutions entirely miss such shocks, the researchers said, instead forecasting that steady economic growth will be slowed only by gradually rising average temperatures. This is because the models assume the future will behave like the past, despite the burning of #fossilfuels pushing the climate system into uncharted territory. Tipping points, such as the collapse of critical Atlantic currents or the Greenland ice sheet, would have global consequences for society. Some are thought to be at, or very close to, their tipping points but the timing is difficult to predict. Combined #extremeweather disasters could wipe out national economies, the researchers, from the University of Exeter and financial thinktank Carbon Tracker, said. Their report concludes governments, regulators and financial managers must pay far more attention to these high impact but lower likelihood #risks, because avoiding irreversible outcomes by cutting carbon #emissions is far cheaper than trying to cope with them. “We’re not dealing with manageable economic adjustments,” said Dr Jesse F Abrams, at the University of Exeter. “The climate scientists we surveyed were unambiguous: current economic models can’t capture what matters most – the cascading failures and compounding shocks that define climate risk in a warmer world – and could undermine the very foundations of economic growth.” “For financial institutions and policymakers, it’s a fundamental misreading of the risks we face,” he said. “We are thinking about something like a 2008 [crash], but one we can’t recover from as well. Once we have ecosystem breakdown or #climatebreakdown, we can’t bail out the Earth like we did the banks.” Mark Campanale, CEO of Carbon Tracker, said: “The net result of flawed economic advice is widespread complacency amongst investors and policymakers. There’s a tendency in certain government departments to trivialise the impacts of climate on the economy so as to avoid making difficult choices today. This is a big problem – the consequences of delay are catastrophic.” Read more below. Read the report here: https://lnkd.in/erv73pNh

Traditional financial risk models were designed around three assumptions: (i) that variables fluctuate around historical norms, (ii) that risks can be diversified through portfolio construction, (iii) and that exposures can be hedged. Climate risk fits none of these assumptions comfortably. It does not behave like a cyclical variable reverting to a mean over time. It accumulates. It is not an idiosyncratic risk that can simply be diluted across sectors or geographies. It is systemic by nature. And its dynamics are not linear. Climate risk involves tipping points capable of abruptly and irreversibly changing entire pricing regimes. Even so, for nearly two decades, the financial industry has devoted enormous intellectual energy to refining quantitative tools intended to measure risk within a conceptual framework that was never built for it. We became increasingly sophisticated at producing highly precise answers to the wrong question. The parallel with 2007 is difficult to ignore. Before the global financial crisis, VaR models consistently suggested that mortgage portfolios were relatively safe because they were calibrated using historical datasets that did not include scenarios of generalized default correlation. The regime the models could not identify was exactly the regime that eventually materialized. Climate risk has a remarkably similar structure. The moments in which transition dynamics become disorderly, physical feedback loops intensify, policies shift abruptly, and large groups of assets reprice simultaneously are precisely the moments where historically calibrated models tend to generate their most reassuring outputs. At some point, the issue stops being a lack of sophistication and becomes a problem of epistemology. If the underlying phenomenon is structurally different from the assumptions embedded in the model, additional layers of mathematical refinement may simply increase the illusion of control. In that sense, part of what is currently presented as sophistication in risk modelling may actually be amplifying the very blindness it seeks to solve.

Climate risk is increasingly a capital allocation issue, not just a sustainability issue. • Bloomberg’s analysis in this in-depth piece shows the climate moving in less linear and more abrupt ways: record heat across the U.S. and Europe, accelerating sea level rise, heavier rainfall, faster ice melt, and rising concern about major ocean-current disruption. • For business leaders, this moves resilience into the core of strategy: infrastructure, insurance, supply chains, workforce health, real estate, energy demand, and business continuity. • For investors, the diligence question is changing. The issue is no longer only emissions exposure. It is physical risk, asset durability, location strategy, productivity loss, grid stress, water availability, and the cost of adaptation. • The opportunity set is also expanding: grid modernization, clean power, storage, cooling, water systems, climate intelligence, resilient infrastructure, and adaptation finance. The question for boards and investors is becoming more tangible: which assets and business models are prepared for a hotter, more volatile operating environment, and which are still priced for yesterday’s climate? https://lnkd.in/g8apQ_ug

I was talking to an enterprise risk leader at a Fortune 500 company last week. I asked: Does climate risk ever make it to your board? Her answer: "It doesn't have the velocity to affect the company in the next 6-12 months." She's not wrong about most sustainability issues. Net zero by 2050 isn't a quarterly conversation. Carbon accounting doesn't require emergency board meetings. But here's where I pushed back: There's a billion-dollar disaster happening almost every day somewhere in the world. Wildfires in California. Cyclones in Southeast Asia. Floods in Europe. Drought across the American Southwest. A global organization with offices, employees, data centers, and suppliers spread across continents isn't insulated from any of this. You're exposed to all of it. The problem isn't that climate risk lacks velocity. The problem is that enterprise risk teams are looking for it in the wrong place. They're waiting for "climate" to show up as a line item. But it's already showing up — in supply chain disruptions, in facility closures, in employee safety incidents, in business continuity failures. It's just not labeled "climate." So it doesn't make the top 10 enterprise risks. It doesn't get a board presentation. And companies keep getting blindsided by events that were entirely predictable. Climate risk has plenty of velocity. It's hitting companies every quarter. The question is whether your risk framework is designed to see it.