Climate change's 'physical risks' are catching up with banks

As the world veers further off course from its goal of limiting global warming to 1.5C above pre-industrial levels, banks are increasingly having to pay attention to the financial implications of a rapidlywarming planet.

The economic shocks inherent to the current trajectory of global warming may leave banks facing loan losses and impaired balance sheets. The Basel Committee on Banking Supervision has said climate change has the potential to affect "the safety and soundness of banks and the stability of the broader banking system." Until recently, banks have mainly focused on what so-called transition risks mean for their underlying business.

These risks are tied to changes in asset values and other costs associated with the decarbonisation of the global economy.