Global Economy's Blind Spot: Climate Risks Threaten Financial Stability
The global economy faces a significant blind spot: its vulnerability to climate risks. Despite increased awareness, no one is benefiting from short-term bets, and everyone is set to lose. Meanwhile, weather-related damages have soared, with the last decade costing over US$2 trillion.
In the aftermath of the 2008 financial crisis, the banking sector has seen stricter rules and oversight, restoring trust and resilience. However, a decade later, systems and processes remain ill-equipped to measure and manage climate change risks. Extreme weather events have doubled in intensity since 2003, with record droughts in Africa causing acute hunger for 23 million people in 2023.
Insurers are grappling with the reality of climate change, leading to exorbitant premium hikes or market exits, making entire regions uninsurable. Many governments and businesses underestimate and underprice physical climate risk, leaving the global economy vulnerable to acute and chronic climate-driven shocks that could surpass the 2008 crisis.
Leading companies and governments face pressure to implement sustainable strategies, as they grapple with rising CO2 prices and competitive disadvantages. Banks assess credit risk for new technologies, but practices remain unclear. The Financial Stability Board warned in 2015 of climate change's systemic threat, echoing the 2008 crisis' lesson on shattered expectations. Urgent action is needed to address this growing blind spot and mitigate potential economic catastrophe.
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