The Financial Impact of Climate Change

Submitted by Krista Lambert | published 21st May 2021 | last updated 11th Oct 2021

Climate Adaptation Training Annotation

  • Level: Introductory
  • Time commitment:  3 hours per module (4 modules in total) - 12 hours total
  • Learning product: Online course 
  • Sector: multi-sector, infrastructure, city planning, agriculture, forestry, tourism, natural resource management 
  • Language: English
  • Certificate available:  completion certificate; microcredential program in development
image of financial stock charts

Introduction

This four-week course introduces participants to the financial risks and impacts associated with climate change. Participants will explore a range of risk pathways that link climate and economic systems, including: 

  • physical risks related to direct exposure to climate hazards in the value chain;
  • transition risks arising from abrupt transitions to a low-carbon economy;
  • systemic risks transmitted throughout the economy;
  • extreme risks arising from the complex dynamic nature of climate-economy systems.

Topics will be explored through the use of case study examples, group-based analysis and problem solving.

The learning is supported by readings, videos and live, interactive online sessions. Participants are encouraged to share their own knowledge and expertise in group-based discussion forums.

The Financial Impact of Climate Change course material is available using the links below for self-learning but if you wish to attend a facilitated online course find details here.

Institutional background and trainers

The Financial Imapact of Climate Change by Todd Thexton is licensed under CC BY 4.0  except where indicated. For external links to resources, review the rights and permission details.  

This course is part of the Adaptation Learning Network: Inspiring Climate Action. This course is Creative Commons licensed and the content is free to use with attribution (for external links to resources, please review the rights and permission details).

This course is also offered as a facilitated online course by Royal Roads University. You can find registration information on the Adaptation Learning Network Portal

Who would find this useful?

As an introductory course, this course is suited to those with limited previous experience in climate-related finance or economics and is suitable for multiple disciplines. However, a basic understanding of climate science is presumed.

Training Material

Module 1:  Physical risks

Physical risks arise when climate-related hazards (extreme weather events, wildfire, sea-level rise, etc.) interact with vulnerable human and natural systems.  When those risks materialize, they can have a range of financial impacts on an organization, including (for example):  direct costs for restoration and repair, lost sales revenues, declining consumer demand, and increased financing and insurance costs.

In this module, we’ll use case study examples to explore physical risks of climate change for private and public organizations in the face of a range of potential climate hazards.  We’ll explore both direct physical risks (i.e., those related to an organization’s own vulnerabilities) and indirect risks (i.e., those that materialize elsewhere in an organization’s value chain, such as with its suppliers, transportation infrastructure, consumers, etc.)

Video attribution: "Catastrophe Models - Part 1" by Todd Thexton, Financial Impact of Climate Change, Adaptation Learning Network is licensed under CC BY 4.0.

Module 2:  Transition risks

Module 2 focuses on so-called “transition risks”—risks arising from the process of transitioning (possibly rapidly) to a low-carbon economy in response to climate change.  Transition risks can arise from changes in policy, technology, and market conditions.  The financial risks of transition include increased input prices and operating costs, abrupt changes to asset values, and deterioration of competitiveness and market share.

In this module, we’ll apply a range of policy, technology and market scenarios to uncover the transition risk exposure of some sample organizations.

Video attribution: "Transition timing and delayed action" by Todd Thexton, Financial Impact of Climate Change, Adaptation Learning Network is licensed under CC BY 4.0.

Module 3:  Systemic Risks

Module 3 explores systemic risks—risks that impact entire economies.  Besides the scope of the potential impacts, one of the characteristics of systemic risk is that it is difficult—if not impossible—to diversify against the risk.  So, even organizations that otherwise have relatively low exposure to physical and transition climate risks are likely to be impacted, should the systemic risks materialize.

In this module, we’ll examine three inter-related systemic risks:  financial stability; macro-economic stability (e.g., GDP, price levels, unemployment, interest rates); and, public budgetary failure.  We’ll explore how these three system-level risks interact with each other, and with the physical and transition risks identified in Modules 1 – 2.

Video attribution: “Climate change and the insurance industry” by Todd Thexton, Financial Impact of Climate Change, Adaptation Learning Network is licensed under CC BY 4.0.

Module 4 Quantifying risk under deep uncertainty

Module 4 examines the challenges of quantifying financial risk given the complex dynamic nature of the climate-economy system, and explores how underpricing risk can result in decision-making that is, at best, sub-optimal, and at worse, potentially catastrophic. Unlike the risks normally encountered by an organization, climate risks are characterized by a higher probability of extreme impacts that are not only financial, but also existential.

When financial models fail to account for the likelihood of extreme values, climate change risk will be underpriced.  As a result, decision-makers (governments, businesses, households) may make less-than-optimal choices that can exacerbate, rather than mitigate, the climate crisis (for example, by delaying or watering down action).

In this module, we’ll explore the complex dynamic nature of climate and economies, and consider various models for decision-making under deep uncertainty.

Video attribution: “Decision-making under deep uncertainty” by Todd Thexton, Financial Impact of Climate Change, Adaptation Learning Network is licensed under CC BY 4.0.

Learning Outcomes

Upon completion of the course, participants will have a foundational understanding of the relationship between climate change and the economy. Participants will develop their ability to identify climate-related financial risks within their own organizations—critical groundwork for effective planning and decision-making for mitigation and adaptation.