Consequences of climate hazards to the financial services system FIGURE 21 Floods and tropical cyclones depreciate property values Commercial and retail mortgages are highly exposed to climate-related risks, particularly in flood-prone areas. Floods and tropical cyclones will likely cause a depreciation of property values and limit the availability and affordability of insurance. According to empirical research, residential properties in flood-risk areas were overvalued by $121-237 billion in 2023.137 Banks that hold significant stakes in these properties may incur increased loan losses if too many of the properties they back are affected.138 Less immediate hazards such as drought and extreme heat could lead to a permanent market shift away from certain real estate areas, impacting banks’ loan portfolios.139Climate risk disrupts cash flows and market valuations Corporate investments are increasingly vulnerable to shrinking margins due to climate hazards. Climate hazards can significantly affect business performance through asset damage, operational disruptions and reduced cash flows, ultimately impacting the ability to repay debt and company valuations.140 Financial markets may rapidly reprice assets exposed to climate risks, negatively affecting the market valuations of these investments.141 Consider hydroelectric plants in Sub-Saharan Africa, which provide approximately 40% of power in the region: asset valuations are likely to suffer if climate hazards drive annual financial losses estimated at $2.1 billion by 2035, rising to $3.7 billion by 2055 under a high emissions scenario.142Extreme heat Wildfire Tropical cyclone Coastal flooding Fluvial flooding Water stress DroughtFinancial services Banking Insurance & reinsurance Retail Commercial Investment Retail Commercial Reinsurance Dominant hazards Property devaluationDecreased financial asset valuesHigher costs for insurance providers due to extreme weather events Decreased demand for mortgages & loansImpaired portfolio performance due to lower stock pricesSmaller customer base due to higher premiums, limited coverage or withdrawal from risk-prone areas Increased credit risk (default or insolvency)Higher losses due to business interruptionsIncrease in claims due to weather-related damage to real estate, automobile & company’s tangible assetsIncreasing exposure to severe losses Increased risk for the mortgage portfolioIncreased risk for the investment portfolioHigher losses for life & health insurance due to human health impactsHigher losses due to business interruptionsRising demand for reinsurance offerings Decreased revenue due to higher rejection rate for loan applicationsPoorly informed investment decision-making Threat to financial stability Business on the Edge: Building Industry Resilience to Climate Hazards 42

Business on the Edge 2024