Understanding and Managing the Financial Risks of Climate Change: Actionable Strategies for Resilience

By Samantha CollinsLast Updated September 1, 2025

Photo by Dibakar Roy on Unsplash

Introduction: Climate Change as a Financial Risk Multiplier

Climate change is no longer just an environmental concern-it is a profound driver of financial risk for businesses, investors, governments, and communities worldwide. In recent years, policymakers and financial regulators have recognized that the impacts of climate change extend far beyond physical damage, reshaping entire markets, insurance structures, and investment portfolios. The financial sector, in particular, faces both direct and indirect threats from extreme weather, sea level rise, shifting energy demands, and rapid policy evolution. Understanding, quantifying, and managing these risks is essential for ensuring long-term economic stability and resilience.

Types of Financial Risks Stemming from Climate Change

Financial risks related to climate change are typically categorized into two main types: physical risks and transition risks :

Physical risks refer to the direct financial losses caused by climate-related events such as hurricanes, floods, droughts, wildfires, and rising sea levels. These events can damage infrastructure, disrupt supply chains, and lead to costly insurance claims. According to the U.S. Congress, increasing frequency and severity of extreme weather events will “disrupt and damage private property and critical infrastructure” and “drastically increase insured and uninsured losses” [1] .

Transition risks are tied to the shift toward a low-carbon economy. As governments adopt new policies, technologies change, and consumer preferences shift, certain industries-especially fossil fuels and energy-intensive sectors-face significant financial exposure. This could leave investors and companies with “trillions of dollars of stranded assets around the world” as demand for fossil fuels declines [2] .

How Climate Risks Impact Financial Markets and Institutions

Climate risks manifest across the financial system via several mechanisms:

Credit risk rises as borrowers in vulnerable sectors or regions default on loans due to physical damages or declining asset values.
Market risk grows as asset prices fluctuate in response to climate news, policy changes, or shifts in supply and demand.
Insurance risk increases as catastrophic events become more frequent and costly, creating protection gaps when coverage becomes unaffordable or unavailable [3] .
Systemic risk emerges when shocks in one sector or market spill over, amplifying financial instability across borders and asset classes [5] .

For example, the Financial Stability Board (FSB) describes how a “severe yet plausible” climate shock to real estate could destabilize the broader economy if insurance coverage gaps force losses onto households, businesses, or governments [3] .

Assessing and Measuring Climate-Related Financial Risks

Effective assessment is the foundation of sound risk management. Leading regulators and financial institutions are adopting scenario analysis to estimate the impact of various climate pathways on portfolios and operations. The Climate Change Financial Risk Act of 2025 requires U.S. banking regulators to conduct annual assessments and develop surveys to evaluate how banks are exposed to both physical and transition risks [1] .

To begin assessing your organization’s exposure to climate risks, you can:

Identify assets, operations, and supply chains located in vulnerable regions or high-risk sectors.
Analyze historical data and model future climate scenarios relevant to your business or investment portfolio.
Regularly review regulatory guidance and industry best practices for climate risk disclosures and scenario analysis.
Engage with insurance providers and financial advisors to understand evolving coverage terms and risk premiums.

Many organizations leverage reports and toolkits from the Financial Stability Board (FSB) and other global bodies for methodologies and data sources.

Mitigation and Adaptation: Strategies for Managing Financial Risks

There is no one-size-fits-all approach to managing climate-related financial risks, but certain strategies can help organizations build resilience:

Integrate climate risk into enterprise risk management: Financial institutions and corporations should embed climate considerations into lending, investment, and operational decisions. Weaknesses in “identifying, measuring, monitoring, and controlling” climate risks can “adversely affect the safety and soundness of a financial institution” [2] .
Invest in adaptation and infrastructure upgrades: Upgrading facilities, diversifying supply chains, and investing in resilient infrastructure can reduce vulnerability to extreme events and long-term climate shifts.
Shift portfolios toward sustainable assets: Investors are increasingly reallocating capital toward companies with strong environmental, social, and governance (ESG) credentials, recognizing both the risk and opportunity in the transition to a low-carbon economy.
Engage with policymakers and industry peers: Collaboration across sectors and borders is essential to developing harmonized disclosure standards, data sharing, and coordinated regulatory responses [5] .

For practical guidance, you can consult your industry association, speak with risk management consultants specializing in climate resilience, or review detailed case studies published by the Office of Management and Budget and the FSB [4] .

Accessing Resources and Building a Resilient Strategy

To access current resources, programs, or support related to the financial risks of climate change, consider the following steps:

Stay informed by regularly reviewing reports from the Financial Stability Board, the U.S. Office of Management and Budget, and your sector regulator.
Contact your primary regulator or financial supervisor for guidance on climate risk disclosure requirements and scenario analysis expectations.
Work with your legal and compliance teams to ensure that climate risks are incorporated into all relevant risk management frameworks and disclosures.
Seek out workshops, webinars, or consulting services offered by recognized industry bodies or academic institutions focused on climate resilience and financial stability.
If you are a government contractor or participant in federal programs, monitor updates from the White House Office of Management and Budget and your agency’s climate adaptation plan [4] .

If you are unsure where to begin, a good starting point is to search for “climate financial risk management” and your industry or sector on the official websites of your national regulator, the Financial Stability Board, or the Office of Management and Budget. You can also consult your bank or investment manager for tailored guidance on climate risk exposure and mitigation strategies.

Challenges and Evolving Best Practices

Managing climate-related financial risks is complex and evolving. Key challenges include:

Data Gaps: Reliable, granular data on climate exposures and impacts can be difficult to obtain, slowing effective scenario analysis and decision-making.
Model Uncertainty: Climate models are inherently uncertain, especially for long-term projections and tail risks. Organizations must use scenario analysis with caution.
Regulatory Fragmentation: Different jurisdictions may have varying disclosure standards and regulatory expectations, complicating compliance for multinational firms [5] .
Insurance Coverage Gaps: As losses mount, some risks may become uninsurable, shifting the burden to businesses, households, or governments [3] .

Despite these challenges, industry collaboration, regulatory innovation, and investment in data infrastructure are driving rapid progress. Many financial institutions are voluntarily adopting recommended disclosure frameworks, and global coordination is improving through organizations such as the FSB and G20.

Summary and Next Steps

Climate change is reshaping financial risk management at every level. From physical threats to property and infrastructure to profound shifts in market demand and investment flows, the financial sector must adapt proactively. By integrating climate risk into decision-making, investing in resilience, and collaborating with regulators and peers, organizations can not only mitigate losses but also seize opportunities in the emerging low-carbon economy.

To stay ahead, regularly review the latest reports from your industry regulator and international bodies, consult with risk management professionals, and incorporate climate scenarios into your strategic planning. For further guidance, refer to the resources listed below.