Financial Times – “Basel-based FSB says damage caused by floods, droughts and fires threatens broader pullback in lending, “The world’s financial stability watchdog has warned that disasters caused by climate change are increasingly likely to trigger broader panic in financial markets. The world breached 1.5C of warming above preindustrial levels for the first time last year, raising the prospect of more environmental disasters. The Financial Stability Board said the financial damage of climate shocks such as floods, droughts, fires or storms could cause a broader pullback in lending and downturn in investor confidence. “Banks could reduce lending, including for recovery to already vulnerable households and corporates,” the body, which brings together the world’s central bankers, ministers and regulators, said. “There could also be an abrupt, broad-based repricing of climate-physical risk, as the expectation of larger future losses are incorporated into current prices and impact sectors and jurisdictions not currently directly affected by disasters.” The report comes amid broader concerns about the capacity of the insurance sector to cover losses associated with climate change following devastating fires in Los Angeles that are estimated to have caused tens of billions of dollars’ worth of damages. The Californian crisis has put the spotlight on how some major companies have been pulling out of the state, leaving about 10 per cent of residences without home insurance and many others reliant on a non-profit insurer of last resort. Leading reinsurance groups are also paring back their exposure to natural catastrophe risks, while US lender Wells Fargo believes insurance payouts for the Californian fires could reach $30bn. The Basel-based FSB said its research also found climate change was making insurance less available and more expensive, while also risking higher property losses and wider market stress.”

Financial Stability Board – Assessment of Climate-related Vulnerabilities: Analytical framework and toolkit, January 16, 2024. “Climate-related shocks could materialise through abrupt changes in policies, technological innovation and/or consumer preferences (transition risks), or through the materialisation of physical hazards, such as floods, droughts or windstorms (physical risks). These shocks raise concerns over financial institutions’ ability to manage their risks and to continue to provide financial services in certain segments and geographical areas. Climate shocks can interact with existing vulnerabilities in the real economy or in the financial system and threaten financial stability through various transmission channels and amplification mechanisms. This report introduces an analytical framework that the FSB will use to trace how physical and transition climate risks can be transmitted and amplified by the global financial system. This framework builds on the existing FSB Financial Stability Surveillance Framework and focuses on assessing climate-related vulnerabilities holistically, particularly from a cross-border and cross-sectoral point of view…”