Addressing second-order effects in climate risk

𝗖𝗹𝗶𝗺𝗮𝘁𝗲 𝗿𝗶𝘀𝗸𝘀 𝗱𝗼 𝗻𝗼𝘁 𝗿𝗲𝘀𝗽𝗲𝗰𝘁 𝗯𝗼𝗿𝗱𝗲𝗿𝘀; 𝘁𝗵𝗲𝗶𝗿 𝗶𝗺𝗽𝗮𝗰𝘁𝘀 𝗰𝗮𝘀𝗰𝗮𝗱𝗲 𝗮𝗰𝗿𝗼𝘀𝘀 𝗿𝗲𝗴𝗶𝗼𝗻𝘀 𝗮𝗻𝗱 𝘀𝗲𝗰𝘁𝗼𝗿𝘀, 𝗰𝗿𝗲𝗮𝘁𝗶𝗻𝗴 𝘀𝘆𝘀𝘁𝗲𝗺𝗶𝗰 𝗿𝗶𝘀𝗸𝘀 𝘁𝗵𝗮𝘁 𝗮𝗿𝗲 𝗱𝗶𝗳𝗳𝗶𝗰𝘂𝗹𝘁 𝘁𝗼 𝗽𝗿𝗲𝗱𝗶𝗰𝘁 𝗮𝗻𝗱 𝗺𝗮𝗻𝗮𝗴𝗲. 𝗔 𝗻𝗲𝘄 𝗮𝗻𝗮𝗹𝘆𝘀𝗶𝘀 𝗽𝘂𝗯𝗹𝗶𝘀𝗵𝗲𝗱 𝗶𝗻 𝙉𝙖𝙩𝙪𝙧𝙚 𝘾𝙡𝙞𝙢𝙖𝙩𝙚 𝘾𝙝𝙖𝙣𝙜𝙚 𝘀𝗵𝗼𝘄𝘀 𝗽𝗿𝗲𝗰𝗶𝘀𝗲𝗹𝘆 𝘄𝗵𝗲𝗿𝗲 𝘄𝗲 𝗰𝗮𝗻 𝗶𝗻𝘁𝗲𝗿𝘃𝗲𝗻𝗲 𝗺𝗼𝘀𝘁 𝗲𝗳𝗳𝗲𝗰𝘁𝗶𝘃𝗲𝗹𝘆 𝘁𝗼 𝗺𝗮𝗻𝗮𝗴𝗲 𝘀𝘆𝘀𝘁𝗲𝗺 𝗿𝗶𝘀𝗸𝘀. The research employs network analysis, informed by stakeholder input and quantitative data from 102 countries, to model the complex, interconnected relationships that propagate. 𝗞𝗲𝘆 𝗜𝗻𝘀𝗶𝗴𝗵𝘁𝘀 𝗳𝗿𝗼𝗺 𝘁𝗵𝗲 𝗔𝗻𝗮𝗹𝘆𝘀𝗶𝘀 The study identified the most frequent critical intervention points for adapting to cascading climate-related impacts. The highest-ranked points for intervention include: 🔸 Water 🔸 Livelihoods 🔸 Agriculture 🔸 Infrastructure and economy 🔸 Violent conflict and unrest The findings strongly highlight the need for policy coherence, warning against addressing risks in isolation. For example, the authors note that agricultural intensification without integrated water management could worsen water scarcity, creating a new problem for food security. Risk pathways are not uniform. The analysis revealed that low-income countries frequently amplify cascades through social instability. In contrast, high-income countries can trigger different propagation mechanisms through reduced crop exports that affect global trade and food prices. 𝗠𝘆 𝗧𝗮𝗸𝗲 This research confirms that "climate risk" is a complex network problem, not a series of individual, localised events. For businesses and governments, this means adaptation strategies must extend far beyond physical assets. It must account for supply chain vulnerabilities, geopolitical instability, and food and water security in partner countries. Focusing investments and development aid on the five "critical intervention points" identified in this paper is a far more efficient use of capital than reacting to crises when they cross into domestic borders. It demonstrates that investing in adaptation in other countries is an effective strategy for protecting financial markets, maintaining political stability, and preserving the livelihoods of citizens. Source: "Critical intervention points for European adaptation to cascading climate change impacts" by Cornelia Auer, Christopher P. O. Reyer, Weronika Adamczak, et. al. https://lnkd.in/ejBTD6DE #ClimateChange #SystemicRisk #Adaptation #Sustainability #SupplyChain #ClimateRisk #Policy #ESG ___________ 𝘛𝘰 𝘴𝘦𝘦 𝘮𝘰𝘳𝘦 𝘰𝘧 𝘮𝘺 𝘱𝘰𝘴𝘵𝘴 𝘪𝘯 𝘺𝘰𝘶𝘳 𝘧𝘦𝘦𝘥, 𝘱𝘭𝘦𝘢𝘴𝘦 𝘭𝘪𝘬𝘦 𝘰𝘳 𝘤𝘰𝘮𝘮𝘦𝘯𝘵 𝘰𝘯 𝘵𝘩𝘪𝘴 𝘱𝘰𝘴𝘵. 𝘓𝘪𝘯𝘬𝘦𝘥𝘐𝘯 𝘱𝘶𝘴𝘩𝘦𝘴 𝘤𝘰𝘯𝘵𝘦𝘯𝘵 𝘺𝘰𝘶 𝘪𝘯𝘵𝘦𝘳𝘢𝘤𝘵 𝘸𝘪𝘵𝘩. 𝘍𝘰𝘭𝘭𝘰𝘸 𝘮𝘦 𝘰𝘯 𝘓𝘪𝘯𝘬𝘦𝘥𝘐𝘯: Scott Kelly

Inside out and outside in. How climate impacts move through the business. Most companies frame climate through transition risk and physical risk. That framing is incomplete. What matters is how those risks translate into decisions and how those decisions move through the value chain. Two sources of pressure: Transition risks come from system change • Regulation tightening carbon constraints • Technology shifting cost curves • Demand moving toward lower impact products Physical risks come from direct exposure • Floods disrupting assets and logistics • Heat reducing labor productivity • Drought affecting input availability These are already reflected in enterprise risk processes. Direction of impact changes the picture Inside out: Actions taken to manage risk create immediate consequences • Switching suppliers to reduce Scope 3 emissions • Closing or repurposing carbon intensive assets • Securing land for renewable infrastructure These decisions change cost structures, employment, and local economies. Outside in: External conditions reshape performance • Extreme weather affecting production and distribution • Workforce instability in exposed regions • Community resilience influencing operational continuity These show up in downtime, volatility, and margin pressure. Why this matters: Climate decisions do two things at the same time • Reduce exposure • Shift impact across stakeholders That impact feeds back into the business through talent availability, supply chain stability, and operating conditions. Implication for strategy Climate needs to be managed across a full chain of cause and effect: risk → decision → stakeholder impact → business outcome Without that connection, trade offs remain hidden. With it, companies can anticipate second order effects, allocate capital more effectively, and strengthen operational resilience. This is where climate becomes embedded in how the business runs. Source: WBCSD, Business Leaders Guide to a Just Climate Transition

“𝘚𝘩𝘰𝘸 𝘮𝘦 𝘸𝘩𝘦𝘳𝘦 𝘤𝘭𝘪𝘮𝘢𝘵𝘦 𝘳𝘪𝘴𝘬 𝘤𝘩𝘢𝘯𝘨𝘦𝘥 𝘢 𝘥𝘦𝘤𝘪𝘴𝘪𝘰𝘯.” That is now the defining question for UK banks and insurers. Not because of theory. Because the evidence has shifted.  • The 𝗡𝗮𝘁𝗶𝗼𝗻𝗮𝗹 𝗖𝗹𝗶𝗺𝗮𝘁𝗲 𝗘𝗺𝗲𝗿𝗴𝗲𝗻𝗰𝘆 𝗕𝗿𝗶𝗲𝗳𝗶𝗻𝗴 makes clear the UK is already experiencing systemic physical risk.  • 𝗟𝗦𝗘𝗚 data shows UK-listed assets among the most exposed globally to 𝗳𝗹𝗼𝗼𝗱 𝗿𝗶𝘀𝗸.  • S&P Global now frames the world as tracking toward ~𝟮.𝟯°𝗖 𝗯𝘆 𝟮𝟬𝟰𝟬, not some distant horizon.   Markets don’t reprice climate risk smoothly; they reprice it when assumptions break. That context matters for the PRA’s Policy 𝗦𝘁𝗮𝘁𝗲𝗺𝗲𝗻𝘁 𝗣𝗦𝟮𝟱/𝟮𝟱, which updates and replaces SS3/19 with SS4/25. Under SS4/25, supervisors are not interested in your framework. Not your disclosures. Not the fact that you’ve run scenarios. They are interested in a decision.  • A loan repriced.  • A location exited.  • A risk limit tightened. An assumption has been adjusted because future risk no longer resembles historical loss data. PS25/25 does not invent new requirements. What it does is raise the bar on how firms evidence judgement. The PRA is clearer and more explicit about how climate risks should be integrated into governance, risk management, and scenario analysis and, critically, how that integration influences real outcomes. This is what principles-based regulation actually means in practice. There are no prescribed actions. But supervisors will expect firms to justify why their approaches are reasonable, proportionate and credible given their exposures, especially where data is imperfect, and uncertainty is unavoidable.  • 𝗙𝗼𝗿 𝗯𝗮𝗻𝗸𝘀, this scrutiny increasingly shows up through second-order effects: changes in insurance pricing or availability feeding directly into collateral values, credit assumptions and liquidity resilience.  • 𝗙𝗼𝗿 𝗶𝗻𝘀𝘂𝗿𝗲𝗿𝘀, it shows up when historic loss experience is no longer a sufficient guide for underwriting, reserving or capital planning. For both, it shows up when climate scenario analysis exists, but doesn’t change decisions. Supervisors are not asking for perfect models. They are asking whether leadership understands the limits of those models and has acted accordingly. By 2026, the question is whether your decisions and ultimately your balance sheet show you understood climate risks. 𝗣𝗥𝗔 𝗣𝗼𝗹𝗶𝗰𝘆 𝗦𝘁𝗮𝘁𝗲𝗺𝗲𝗻𝘁 𝗣𝗦𝟮𝟱/𝟮𝟱 (𝗗𝗲𝗰 𝟮𝟬𝟮𝟱): 👉 https://lnkd.in/eyS45KXP #ClimateRisk #RiskManagement #PRA #SS4_25 #Banking #Insurance #CRO

Incredibly important report alert. The Financial Stability Board (FSB) have produced a new Assessment of Climate-related vulnerabilities, including an analytical framework and toolkit for its members. The analysis makes for sobering reading but it is also a really important development to see these risks and the way in which they could manifest within and be amplified by the financial system recognised by the FSB. What will be critical is how this analysis feeds through into the response of members and, in turn, the way that these risks and monitored, managed, and mitigated within the financial system. The impacts the Assessment considers are ones that need to be avoided pre-emptively through actions taken now whilst that remains possible, rather than seeking to deal with the consequences after the event, which makes this Assessment an important and welcome step. A couple of key excerpts: - "Climate-related vulnerabilities in the financial system, when triggered by climate shocks, could threaten financial stability through various transmission channels and amplification mechanisms.  This can be more complicated than for non-climate shocks given uncertainties around their timing and magnitude, non-linearities from tipping points, as well as second-order and spillover effects." - "The interactions of transition and physical risks or among physical risks could be a particular source for non-linear climate dynamics and compound climate shocks could be further amplified by existing financial vulnerabilities, such as asset mispricing or high leverage, creating financial losses." - "Once crystallised, climate-related risks are transmitted and amplified through the traditional channels used in financial stability assessments, including credit, market, and liquidity risks. Climate shocks could also affect the real economy through damage to real assets or the creation of stranded assets, or a disruption to economic activity that can feed back to the financial system. Risks that are opaque and not well-managed could create correlated shocks whose impact is magnified as they propagate through the system." - There is a specific case study that looks at physical risk impacts on real estate markets and envisages a series of extreme climate events that results in direct damages and a reassessment of physical risks, leading to larger uninsured property damages and increased bank credit risk. There are then potential amplification mechanisms including reduced bank lending, and "an abrupt, broad-based repricing of climate-physical risk, as the expectation of larger future losses are incorporated into current prices and impact sectors and jurisdictions not currently directly affected by disasters". With the impacts we have sadly already seen in 2025, including in Los Angeles, this feels particularly prescient. Link to report below and to an FT article on the same in the first comment. https://lnkd.in/ejmS-ZMD

📢 Here are some of the biggest things missing from climate risk assessments... We know that the impacts of the weakening of AMOC is one of them. It acts like an Atlantic-spanning central heating system. So a weaker AMOC means a colder northern hemisphere. That's very bad. But for it to be meaningfully included in assessments, we really need more information on how bad. So far, the studies looking at this haven't considered something that's crucial to answering that question. It's to do with the net effect of two things going on. The first is AMOC weakening making things cooler. But that weakening is driven by climate change, which makes things hotter. So, we need to know how those effects might balance each other. And a new study out today does this. It's from René van Westen (whose name you might remember from recent important AMOC papers) and Michiel Baatsen. The key finding: A significantly weaker AMOC and +2C of global heating still leads to devastating cold impacts. They mainly looked at Europe. The results are severe, including: - The Arctic ice pack extends over parts of Britain (!!) - London and Paris hit by extreme cold of -18C once a decade - Edinburgh sees a minimum daily temperature below 0C for nearly half the year So even with 2C of global heating, AMOC weakening leads to extreme conditions that are unsurvivable for lots of things in these places. The Winter of 62/63 in the UK springs to mind. Temperatures dropped to similar double digit lows - something which the country, people, and nature all weren't build to cope with. There were nearly 90,000 excess that winter (far more than during the Covid pandemic). Infrastructure broke. Farming and nature were severely damaged, including over 80% losses of bird populations. All these had domino effects across society. We're talking about something similar but far worse. There are of course lots of uncertainties about whether AMOC could weaken this much and when this could happen, and so on. The results are also focused on what happens well after AMOC weakening has played out, giving us little to understand what might happen in the more immediate wake of such a shift. But any risk assessment should include the worst. And that includes AMOC weakening. This new study has given us more information about that. And this is a dangerously under-assessed area. We desperately need more information on how such changes in temperature impact the things decision-makers directly care about, like food security, geopolitics, economic stability, and so on. For now, check out this new study - The paper: https://lnkd.in/gPVUPi24 - And a tool to explore the scenarios: https://amocscenarios.org/

After two years, the EU climate risk assessment is finally out. It shows the range of climate risks Europe is already facing and the consequences of not adapting (fast enough) in the future. Climate risks are increasingly urgent as they compound and cascade across European sectors, regions, and vulnerable groups. The adaptation gap is growing as the rate of action is not keeping up with the rate of climate change. This key message from the report has been picked up by the media, but there are a few other things in the report that I feel deserve some attention: - Urgency to act is not solely determined by climatic hazards; it also hinges on the readiness of our institutions and their current actions to address the varying time horizons. Many plans exist and several express high ambitions, but they often lack concrete and meaningful actions. - Maladaptation poses a significant concern: in some cases, people are adapting to climate risks, but without careful consideration, they may inadvertently shift the problem to other sectors, regions, or social groups, exacerbating the issue over time. - A clear yet often overlooked 'transition risk' exists: the process of transforming systems to better withstand future climate risks necessitates substantial investments and challenges existing regulations and practices. - Inequalities and vulnerabilities perpetuate a vicious circle where each exacerbates the other. Addressing climate risks = addressing structural inequalities and vulnerabilities. Existing European policies and plans often recognize the importance but offer limited focus on just resilience. - Litigation related to climate risks and adaptation, wherein citizens hold state and non-state actors accountable for the lack of progress on adaptation, is likely to increase across Europe. There are many more valuable insights in the underlying 300+ page report that informs the future of climate risk and adaptation in Europe. Read it here: https://lnkd.in/eU7ema5r

Companies are facing a new reality. Climate hazards are no longer distant risks. They are hitting balance sheets, disrupting supply chains, and eroding profitability. Fixed asset losses could reach $610 billion per year by 2035, climbing to over a trillion by 2055. Extreme heat alone will drive nearly three-quarters of those losses, hitting telecommunications, utilities, and energy infrastructure hardest. Business as usual is no longer an option. Business on the Edge: Building Industry Resilience to Climate Hazards, published by the World Economic Forum (WEF) in collaboration with Accenture, examines the scale of these risks and what they mean for corporate decision-making. The report connects climate science with financial exposure, analysing how extreme weather, ecosystem collapse, and tipping points will reshape industries and economies. The global economy is built on assumptions that are no longer valid. Earth’s life-support systems are destabilising. Five critical tipping points may already be breached, triggering irreversible shifts. The Greenland and West Antarctic ice sheets are collapsing. Warm-water coral reefs are dying. Permafrost is thawing, releasing carbon and methane that will accelerate warming. Ocean circulation patterns are weakening, threatening food and water security across continents. These changes do not move in a linear fashion. They amplify one another in complex and unpredictable ways. Economic models are failing to capture the full extent of the risk. Financial losses from climate hazards are often viewed as isolated incidents, but they are compounding into systemic disruptions. Extreme weather events are becoming harder to insure. Supply chains are fracturing. Market volatility is increasing. The cost of inaction is rising faster than most business leaders realise. Some companies are taking steps to adapt. The ones that move now will be best placed to navigate the coming turbulence. Climate risk audits, data-driven scenario planning, and investment in resilience are no longer optional. They are fundamental to financial stability. The return on investment is clear. Businesses that integrate adaptation measures see returns between two and nineteen times their initial investment. This is a moment of reckoning. The rules of the game are shifting. Those who fail to see it will find themselves left behind. Those who act will not only protect their assets but shape the future of their industries. #ClimateRisk #BusinessResilience #Sustainability #ClimateAdaptation #RiskManagement #CorporateStrategy

Climate Disclosure Is No Longer About Reporting- It’s About Risk Architecture. I’ve just reviewed Bank of America’s 2025 ISSB IFRS S2 Climate Disclosure, and one thing is clear: Leading financial institutions are no longer treating climate as a CSR topic. They are embedding it into enterprise risk, capital allocation, and long-term strategy. Here are the executive-level insights that matter: ▮Climate Governance is Now Board-Level Business Climate oversight sits within core board committees - Risk, Audit, Governance- not in a standalone sustainability silo. That’s a signal: climate = financial materiality. ▮Climate Risk Is Integrated Across All Risk Types Credit. Market. Liquidity. Operational. Strategic. Reputational. Physical and transition risks are assessed through the same rigorous frameworks used for financial risk management. This is what IFRS S2 intended. ▮Scenario Analysis Is Becoming a Strategic Tool - Not Just a Compliance Exercise Using NGFS pathways (Net Zero 2050, Delayed Transition, NDC), the bank stress-tests portfolios across sectors and geographies. Key insight? Climate combined with macroeconomic stress compounds impact. Second-order effects matter. ▮Operational Emissions Are Under Control- But Financed Emissions Are the Real Story Scopes 1 & 2: materially reduced and carbon neutral. Scope 3 (financed emissions): sector-specific intensity targets across energy, aviation, cement, steel, power, shipping and auto manufacturing. This is where transition credibility lives. ▮Intensity vs. Absolute Emissions - Both Matter Intensity improvements can coexist with rising absolute emissions. Serious disclosures now report both. ▮Carbon Credits Are Used- But Framed Carefully Offsets are positioned as supplementary, with increasing focus on high-integrity removal credits. The market will continue scrutinizing this balance. Climate disclosure is evolving from sustainability storytelling to: • Capital exposure mapping • Sectoral decarbonization alignment • Insurance risk assessment • Transition finance positioning • Regulatory preparedness The question is no longer “Are we reporting?” It’s “Are we structurally resilient?” For banks and large corporates in emerging markets including the Middle East and Africa, the implication is clear: Global standards (ISSB, NGFS, PCAF) are becoming the language of capital access. And capital increasingly flows toward credible transition pathways. Climate strategy today is not about restriction. It is about intelligent repositioning. #Sustainability #ClimateRisk #IFRSS2 #ISSB #ESG #SustainableFinance #RiskManagement #NetZero #TransitionFinance #BoardGovernance

Happy to share a recent working paper, "Carbon Risk and Corporate Creditworthiness: Evidence from a Major Emerging Economy," led by Dr Marcin Borsuk. This is part of our research in the India Transition Finance Program (https://lnkd.in/gPiXXi77) and Environmental Stress Testing and Scenarios (https://lnkd.in/gQBjGpiv) projects at the Oxford Sustainable Finance Group at the Smith School of Enterprise and the Environment - University of Oxford as well as the UK Centre for Greening Finance and Investment (CGFI). Context: - Addressing climate change requires a swift transition to a low-carbon economy.  - Governments are introducing stringent climate policies to accelerate this transition.  - Evidence suggests that financial markets penalize heavy emitters in developed countries. This study: - India is increasingly exposed to transition risks as it engages with global climate efforts.  - This study examines how transition risk is priced into credit risk of Indian companies.  - This study also incorporates climate-economy scenarios to project how different climate policy pathways might impact firms’ default risk. Findings: - Higher carbon emissions are associated with significantly elevated credit risk. - The effect of transition risk on firms’ credit risk is heterogeneous and varies with firm characteristics. - Policy shift around the Paris Agreement has affected investor perceptions of credit risk. - Transition risk affects credit risk through two channels – reputation and cost of capital.  - Forward-looking scenario analysis further indicates deterioration of credit risk. Implications: - Regulators and central banks should incorporate climate risk into credit assessment frameworks to safeguard financial stability.  - Firms should strengthen ESG governance, financial resilience, and sustained low-carbon investment as effective hedges against elevated credit risk stemming from the low-carbon transition. #india #climaterisk #creditrisk #transitionrisk #emissions #reputation #costofcapital #governance #resilience #lowcarbon Working paper is here: https://lnkd.in/dwcBxZpG Executive summary is here: https://lnkd.in/dVmvmFSk

Most of the conversation right now is about oil. Prices, tankers, the Strait of Hormuz. It makes sense, because energy is the first thing markets react to. But focusing only on oil is missing the bigger picture. What the chart clearly shows is that the Middle East is not just an energy supplier. It sits at the core of multiple supply chains that quietly power the global economy. Sulphur feeds fertilizers. LPG and naphtha sit at the heart of petrochemicals. Helium is essential for semiconductors and medical systems. Fertilizers directly affect food production. Aluminum supports transport and construction. Methanol and derivatives end up in plastics, textiles, and everyday consumer goods. In other words, this is not just about fuel. It is about the inputs behind almost everything we produce and consume. If disruptions deepen, the impact will not be limited to higher oil prices. It will start to show up in places that feel far removed from geopolitics. Food prices can rise if fertilizer supply tightens. Manufacturing can slow if petrochemical feedstocks or metals become constrained. Technology supply chains can feel pressure through something as niche, but critical, as helium. Even healthcare systems are indirectly exposed. This is where the real risk lies. Not in a single shock, but in multiple pressure points hitting at the same time. Markets tend to price what they can see immediately. Oil is visible. But second-order effects take longer to emerge, and when they do, they tend to be more persistent and harder to reverse. If several of these supply chains are disrupted simultaneously, it becomes much harder for the system to adapt. Substitution is limited, inventories draw down quickly, and costs ripple through the entire economy. That is how a regional conflict turns into a global economic problem. Oil may be the headline. But the real story is that the Middle East sits at the intersection of energy, materials, food, and industrial production. And if that intersection is disrupted, the consequences will reach far beyond the energy market. Source: Morgan Stanley