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

By Samantha CollinsLast Updated August 29, 2025

Photo by Markus Winkler on Unsplash

Introduction: The Growing Financial Threat Posed by Climate Change

Climate change is no longer just an environmental issue; it is now recognized as a significant driver of financial risk for economies, businesses, investors, and governments worldwide. The increasing frequency and severity of extreme weather events, alongside the evolving policy landscape and technological shifts, are reshaping global markets and exposing vulnerabilities at every level of the financial system. The financial risks of climate change can manifest suddenly or develop over years, but their impact is already being felt across industries and communities. Understanding these risks and implementing effective strategies to address them is crucial for anyone involved in finance or policy.

Types of Financial Risks from Climate Change

Financial risks related to climate change generally fall into two broad categories: physical risks and transition risks . Each presents unique challenges, demanding nuanced approaches to assessment, disclosure, and risk management.

Physical Risks

Physical risks arise from the direct impact of climate change, such as more frequent and intense storms, wildfires, floods, droughts, and rising sea levels. These events can disrupt critical infrastructure, damage private property, and interrupt supply chains, leading to significant insured and uninsured losses. In the United States, for example, federal agencies have identified critical infrastructure that is increasingly vulnerable to extreme weather events, prompting a surge in adaptation and mitigation programs [3] . On a global scale, gaps in insurance protection for natural catastrophes can shift financial burdens to households, businesses, or governments, amplifying financial instability [2] .

Transition Risks

Transition risks stem from the economic and policy adjustments necessary to move toward a low-carbon economy. These include changes in market demand, regulatory shifts, technological innovation, and evolving societal preferences. For fossil fuel companies and energy-intensive industries, such transitions could mean trillions of dollars in stranded assets-investments rendered obsolete by the shift to clean energy [1] . Transition risks also threaten investors, lenders, and financial institutions with exposure to sectors at risk of rapid devaluation.

How Climate Risks Impact the Financial System

Climate-related financial risks are uniquely far-reaching, impacting credit, counterparty, and market stability across geographies and sectors. The interconnectedness of the modern financial system means that climate shocks-whether physical or transitional-can transmit quickly, causing cascading effects. For example, if insurance becomes less available or more expensive due to rising catastrophe risk, households and businesses may face greater financial burdens, potentially leading to defaults and wider economic disruption [2] .

Weaknesses in how financial institutions identify, measure, and monitor these risks may undermine their safety and soundness. Recognizing this, global regulatory bodies and central banks are urging the adoption of consistent, scenario-based risk management practices [4] .

Case Studies: Real-World Impacts and Lessons Learned

In 2022, Hurricane Ian caused over $112 billion in damages in the U.S., with substantial uninsured losses for both homeowners and businesses. Many affected areas faced long-term economic disruption due to damaged infrastructure and supply chain interruptions, forcing local governments and insurers to reevaluate their risk models and coverage gaps. Similarly, regulatory shifts in Europe have accelerated the decline of coal-fired power plants, resulting in stranded assets and financial losses for investors who did not anticipate the pace of policy change [1] .

Regulatory and Policy Developments

Legislative and policy efforts are underway in many countries to address these risks. In the United States, the proposed “Climate Change Financial Risk Act of 2025” emphasizes the need for financial institutions to integrate climate risk management into their core operations and calls for annual assessments (“stress tests”) to ensure resilience [1] . Internationally, the Financial Stability Board (FSB) has developed a coordinated roadmap for addressing climate-related financial risks, focusing on improved disclosures, data collection, and regulatory practices [4] . The FSB also highlights the importance of closing insurance protection gaps and strengthening cross-border coordination.

U.S. policy direction can have global consequences. For instance, experts warn that relaxing climate regulations could increase financial risks both domestically and internationally, as delayed action tends to magnify future costs [5] .

Implementing Effective Risk Management Strategies

To address climate-related financial risks, organizations, investors, and policymakers can take several actionable steps:

Assess Exposure: Begin by identifying assets, sectors, and geographies most vulnerable to climate impacts. Many companies use scenario analysis to evaluate the effects of different climate pathways on their operations and investments. Federal agencies and large financial institutions are increasingly required to undertake such assessments [3] .
Enhance Disclosure: Accurate, transparent reporting of climate risks allows investors, regulators, and stakeholders to make informed decisions. The FSB’s roadmap recommends adopting standardized climate-related disclosures, such as those developed by the Task Force on Climate-related Financial Disclosures (TCFD) [4] .
Integrate Climate Risk into Core Risk Management: Financial institutions should embed climate risk considerations into their credit, market, and operational risk frameworks. Regular stress testing and scenario planning help organizations prepare for a range of possible outcomes [1] .
Engage Stakeholders: Collaboration among government agencies, private sector players, and community organizations is essential for developing comprehensive adaptation and mitigation strategies. Public-private partnerships can help fill insurance and investment gaps, particularly in underserved communities [3] .
Monitor Policy Developments: Keep abreast of evolving regulations and policy initiatives at both domestic and international levels. Changes in climate policy can have immediate financial implications, so ongoing vigilance is critical [5] .

How to Access Climate Risk Assessment Resources and Support

Individuals, businesses, and public entities seeking support or tools for climate risk assessment and management can consider several approaches:

For federal agencies and programs in the U.S., the White House Office of Management and Budget and relevant federal agencies periodically release reports and guidance on climate risk management. To access these, visit the official White House or OMB websites and search for “climate risk” or “climate adaptation” reports.
For international best practices, materials from the Financial Stability Board are available on their official website. Search for “FSB climate financial risks” to locate the latest roadmaps and technical papers.
Financial institutions can adopt frameworks recommended by the Task Force on Climate-related Financial Disclosures (TCFD). These resources are available through the TCFD’s official website, where guidance and case studies are provided.
To stay informed on regulatory developments, monitor updates from central banks, financial regulators, and reputable industry associations within your jurisdiction. Many publish climate risk guidance and host public webinars or training sessions.

If you are unsure where to start, consult with professional advisors specializing in environmental risk or contact your industry association for guidance on climate risk assessment tools and best practices.

Key Takeaways and Next Steps

Climate change presents complex and far-reaching financial risks that require proactive, coordinated action. Whether you are a business leader, investor, policymaker, or concerned citizen, understanding your exposure and taking concrete steps to address these risks is essential for long-term financial resilience. Begin by assessing your vulnerabilities, enhancing transparency, and integrating climate risk into your core planning processes. Stay informed by engaging with reputable sources, and seek expert guidance when necessary to navigate this rapidly evolving landscape.