Understanding the Pricing Pressures of Climate Change
Climate change has evolved beyond an environmental issue to become a significant economic force impacting financial stability and increasing costs for households and businesses. Rising expenses in food, energy, and insurance are intensifying financial burdens, disproportionately affecting lower-income households. Climate disruptions may elevate global food inflation by 3.2% and overall inflation by 1.2% by 2035. Economic output is increasingly vulnerable, particularly when temperatures surpass critical thresholds, resulting in sharper productivity declines and greater instability.
This Global Risk Institute report demonstrates the inflationary pressures faced by Financial institutions (FIs) from both physical and transition climate risks. Acute physical risks—such as severe weather events—disrupt supply chains, creating short-term inflation spikes. Meanwhile, chronic climate impacts (e.g., rising temperatures, sea-level rise, and desertification) pose persistent, structural inflation threats. Transition risks, including carbon pricing and escalating utility costs, also present longer-term economic pressures.
Climate-induced inflation intersects directly with traditional financial risks—credit, liquidity, and operational risk—necessitating enhanced risk management and strategic planning. Increased costs from climate change reduce household purchasing power, strain businesses, and raise the risk of loan defaults. Additionally, growing liquidity demands from climate-induced disasters emphasize the need for robust financial resilience strategies.
The shift towards a low-carbon economy introduces uncertainties, including escalating carbon prices, higher insurance premiums, and increased infrastructure costs. These factors elevate business costs and economic uncertainty, potentially embedding long-term inflation into the economy.
Given these complex dynamics, FIs must adapt their risk management practices, capital allocation, and investment strategies to maintain stability. Ensuring effective integration of climate-related inflationary impacts into risk frameworks is essential. Proactively addressing climate-induced inflationrisks through enhanced risk modeling, scenario analysis, and targeted resilience investments is crucial—not only for financial stability but also to enable a smoother economic transition amidst escalating climate threats.