As the lynchpin of the global economy, financial institutions have an essential role to play in minimizing the worst impacts of climate change. How banks respond to the climate risk that they individually and collectively face is critical. Whether banks act proactively and ambitiously or reactively and modestly is reflective of how they measure and analyze their exposure to climate risk.
In the fall of 2020, Ceres analyzed the risks banks face from climate transition risk. Those findings indicated that banks that fail to prepare for the energy transition face far higher risks than what has been disclosed. The cumulative exposure could be over $500 billion from just the syndicated loan portfolios of the nation’s largest banks. The total balance sheet exposure is much larger, meaning that without a deliberate carbon transition, a future where well-prepared banks can thrive along with the rest of society will not be possible.
Transition risk, though, is only one part of the climate risk equation. The world is increasingly experiencing all-year forest fire seasons, catastrophic flooding, years-long droughts, and deadly heat waves. In fact, as this report was being finalized the National Oceanic and Atmospheric Administration reported that July 2021 was the Earth’s hottest month on record. The physical impacts of climate change are already here and they are growing. Failing to take a proactive approach to the clean energy transition will turbocharge these physical risks that banks—and broader society—face. In addition to the human toll, these impacts have the potential to grind down our economy, challenge the stability of some bank
portfolios, and punish us year after year, decade after decade, for our failure to take action. And, perhaps unsurprisingly, the burden of that failure will fall disproportionately on developing countries and historically marginalized communities in all countries, including the United States.

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