Climate risk has been a hot topic – if not the hottest – all over the globe in the past few years. It refers to the possible negative impacts that climate change and the transition to a low-carbon economy may have on the economy and society at large. On one hand, physical risk such as more varied temperatures, more frequent and intense floods, wildfires, droughts, storms and other extreme weather events, rising sea levels, loss of biodiversity and more are bringing potential adverse effects on lives, health, infrastructure and financial and economic assets. On the other hand, even if society wants to move to a low-carbon economy, some
industries may see significant changes in asset values or operating costs. The speed with which the shift takes place is also a concern, since the transition could be costly for some companies.

Following the rise in global awareness of climate issues, various international conferences have taken place and several international commitments have been made to address climate change. The financial services industry is certainly at the forefront of this transition due to its systemic importance. Globally, central banks and regulators are demonstrating their awareness and commitment to tackling climate change by issuing various guidelines, protocols and frameworks, and financial institutions are taking actions to adhere to the new rules.

Managing climate risk is a relatively new field and could prove to be complex and challenging. In this article, we will discuss how financial institutions can tackle climate risk effectively.