Climate-related financial risk
Also called: Climate risk · Topic: Environment and Sustainable Development · NCERT: Beyond NCERT
Meaning
Climate-related financial risk is the chance that climate change causes losses for banks, investors and firms. It comes in two types:
- Physical risk comes from extreme weather such as floods, heatwaves and droughts.
- Transition risk comes from changes in policy, technology and markets as the world moves to low carbon.
This matters because such losses can spread through loans and investments and weaken the whole financial system. RBI joined the Network for Greening the Financial System (NGFS) in 2021. It issued a draft framework on climate-risk disclosure in 2024.
Example
A bank lends to a coal power plant. If climate policy or cheaper renewables make the plant lose value early (a stranded asset), the loan may go bad. That is transition risk. A flood that damages farms and stops farm-loan repayments is physical risk.
Related concepts
- Linear economy
- Circular economy
- Recycling
- E-waste
- Extended producer responsibility
- Urban mining
- Right to repair
- Porter hypothesis
- Sustainable infrastructure
- Sustainable consumption and production