01.1 Established fact

Climate change is an established fact

The scientific consensus is unequivocal. The main causes are the burning of fossil fuels (coal, oil and gas), modern agriculture and other anthropogenic factors.

Transnational corporations, financial institutions, regulators, insurers and consultancy firms recognise the problem. Nevertheless, a comprehensive view of the situation remains rare, and even scientists lack a full understanding of the risks and consequences.

Ignoring climate risks today is no longer an environmental issue but a matter of competence

For an investor, the current situation comes down to five facts:

1. Climate change is an objective economic factor.
2. Over the next decade, many asset classes are expected to undergo unprecedented repricing. This process has already begun and will accelerate.
3. The likelihood of a climate-related financial crisis is high.
4. There is a window of time before credit spreads and market prices fully reflect these risks.
5. Investors must independently prepare for these risks and adapt their portfolios—and they must start now.

01.2 Purpose and sources

A unified picture of the changes ahead

The report aims to translate academic knowledge into plain language. We have brought together disparate research to present a comprehensive picture of what our world may become in the near future. The economy and finance represent only one aspect of this transformation.

The conclusions drawn from the data collected require a major reassessment of core development strategies.

The report provides reliable physical benchmarks (the progression towards the +1.5 °C and +2.0 °C thresholds) and describes their cascading impacts. This evidence base makes it possible to grasp the true scale of the changes ahead and begin adapting today.

Moving beyond outdated models

The report draws on more than 200 studies by the world's most respected scientists, macroeconomists, banks and asset management firms.

We draw on the latest data from 2024–2026. These studies fundamentally change the risk picture, but some have yet to be incorporated into the cumbersome mainstream models used by major financial institutions.

The report's reliability is underpinned by four types of sources:

1. Academic research: studies undergo rigorous peer review by independent scientists before being published in leading scientific journals.
2. International organisations: official reports by specialised intergovernmental bodies (the UN, WMO, WHO and others).
3. Institutional analysis: official reports from institutions with unquestioned global authority — central banks, the world's largest insurance and asset management firms, leading rating agencies and other specialised institutions.
4. News media: in rare cases involving recent events, reports from major global news outlets may be used.

01.3 Three problems

Why the true scale remains unrecognised

Problem 1: systemic complexity and cascading impacts

Climate change affects the vast majority of natural and economic systems simultaneously. The resulting interconnections and cascading effects are so complex that calculating them precisely is inherently difficult, even for the scientific community.

Because of a lack of understanding of these complex mechanisms, the changes under way remain unnoticed by most people. The issue slips from view, and the true scale and severity of the consequences ahead go unrecognised.

Problem 2: even the scientific community still lacks a complete picture of what is happening

No single forecasting model exists that accounts for all aspects and consequences of climate change. Some models project only the physical climate system (ESM), while others project only the economy (IAM). They exchange static data, but do not influence one another in real time and fail to capture feedback loops.

One example of these connections:

At the same time, the mandatory multi-stage review process for new scientific evidence takes years. It takes even longer for these findings to be incorporated into the core macroeconomic models used by governments and companies. The result is an institutional lag: the global market is forced to assess risks using outdated information, creating a vast ‘blind spot’ across the economy.

Problem 3: insufficient action

Climate scientists are quite literally sounding the alarm, but the public remains passive while politicians and corporations continue to profit, worsening the problem.

Far too little funding is allocated to averting catastrophic scenarios. Even less is allocated to adaptation to impacts that are already being felt. At the same time, tail risks (low-probability but catastrophic events) are often underestimated or not considered at all, even in scientific reports, owing to limited resources or insufficient data for modelling.

02.1 Broken promises · the +1.5°C reality

Broken promises

In 2015, leaders from almost every country in the world agreed to limit global warming to 1.5°C in order to avoid catastrophic consequences. But those commitments were not met. In 2024, the 1.5°C threshold was temporarily exceeded for the first time, and the latest scientific evidence projects that it will be crossed on a sustained basis as early as 2028. [Kirchengast & Pichler, 2025; WMO, 2025]

Consequences of warming to +1.5°C

• The frequency of extreme heatwaves has increased severalfold. Their geographic extent and duration are also increasing [WWA, 2025]. This reduces labour productivity, increases mortality and causes losses in agriculture and energy, among other impacts.
• The number of days of extreme heat has doubled [«Climate Change and the Escalation of Global Extreme Heat: Assessing and Addressing the Risks» — World Weather Attribution, Red Cross Red Crescent Climate Centre, Climate Central; May 2025].
• Five times as much of the land surface now experiences conditions with a wet-bulb temperature of 31°C, which is dangerous to humans [Climate State 2024].
• The number of extreme weather events has doubled (hurricanes, floods and droughts) over the past 20 years [UNDRR, 2020]. They too are becoming more intense, destructive and unpredictable [WMO, 2024].
• Several-fold and, in some cases, several-dozen-fold increases have occurred in both the likelihood of wildfires and the area they affect [State of Wildfires 2024-25State of Wildfires 2024-25“human-caused climate change made January 2025's burned area 25 times larger... and made fires... around twice as likely. The areas burned in... Amazonia and the Pantanal were also roughly 4-fold and 34-fold larger...”PDF · pp. 36, 42]. What occurred once every 100 years in the pre-industrial era now occurs every 10–18 years [WWA, 2025World Weather Attribution (2025)“The event in today's climate is about a 1 in 10 year event, whereas in a 1.3°C cooler climate, it would be expected to occur once in every 100 years. ... The DSR is projected to become another 25% more intense and another nine times more likely.”PDF · p. 3].
• The rate of sea-level rise has doubled over the past 30 years [Nature, 2024]. This is already causing flooding in some cities and the destruction of coastal property [WMO, 2024].
• The number and duration of droughts have increased by 29% over a 20-year period compared with previous decades [UNCCD, Drought in Numbers, 2022]UNCCD — Drought in Numbers (2022)“The number and duration of droughts has increased by 29 percent since 2000, as compared to the two previous decades”.
• The 11 hottest years on record were the past 11 years. The record-breakers were 2023, 2024 and 2025 [Copernicus, 2025; WMO, 2026].
• Populations of wild mammals, birds, fish, reptiles and amphibians have fallen by 70% since 1970. This is the result not only of climate change but also of overexploitation and environmental pollution [WWF, 2024].
• Global agriculture has lost 21% of its productivity since 1961 [Ortiz-Bobea et al., Nature Climate Change, 2021]

02.2 Climate tax · the present

Economic impact: the climate tax

In 2024–2025, key institutions whose findings shape economic and financial forecasting—the US National Bureau of Economic Research (NBER), the Potsdam Institute (PIK), a consortium of central banks from around the world (NGFSA group of central banks and supervisors, including the ECB and the Federal Reserve, established to help green the financial system), Bloomberg and the UN—presented fundamentally new estimates of the economic damage caused by climate change.

If global temperature has substantial economic effects, why did they not become apparent after nearly 1°C of global warming since 1960? Because climate change occurs in small increments, its effects are hidden by background economic variability. Because climate change is also permanent, its effects continue to accumulate over time.

NBER · 2025

Key findings on the current situation:

• Massive underestimation: the actual economic damage caused by climate change exceeds all previous estimates by a factor of 5–6 [NBER, 2024NBER w32450 — The Macroeconomic Impact of Climate Change: Global vs. Local Temperature (2024); PIK revised version, 2025PIK — The economic commitment of climate change (~$38 trn/year) (2024)].
• Damage already done: climate change alone has already slowed the annual growth rate of the global economy by one-third. As a result, by 2019 global GDP was 19% lower than it would have been without climate change [NBER, 2024]NBER w32450 — The Macroeconomic Impact of Climate Change: Global vs. Local Temperature (2024).
• Even a single phenomenon — heatwaves — can cause direct losses averaging 0.5% of GDP. In 2003, 2010 and 2015, it reduced European GDP by 0.3–0.5% [EEA, 2024]. The damage is highly uneven: Germany loses 0.1% of GDP, Southern Europe around 1.1–1.4% of GDP, the US around 0.6% of GDP and China around 1% of GDP [Allianz, What to watch: Global boiling, 2025Allianz Research — What to watch: Global boiling (2025)“Heatwave may cost -0.5pp of GDP in Europe … losses range from -0.1pp for Germany to as much as -1.4pp for Spain”PDF · p. 1]. These losses could increase fivefold over the next 30 years [WRI, 2025Europe's Heat and Air Conditioning Dilemma“Without action to adapt, these losses could increase fivefold in the next 30 years”Web].
• Wildfire smoke in the US reduces labour income: NBER puts the loss at almost 2% of annual US labour income ($125 billion in 2018 dollars), while Bloomberg estimates wage losses alone at around $150 billion a year [NBER, 2022NBER — Air Pollution and the Labor Market: Evidence from Wildfire Smoke (2022)“each day of smoke reduces quarterly per capita earnings by $5.2, or about 0.10 percent”“wildfire smoke reduces earnings by nearly 2 percent of U.S. annual labor income ($125 billion in 2018 dollars)”; Bloomberg, 2025Bloomberg — Climate Economy Deep Dive (2025)“the impact of wildfire smoke days on wages alone could reach $150 billion a year”].
• Global costs are rising exponentially: climate-related costs increased more than 9-fold—from ~$150 billion in 2000 to $1.4 trillion in 2024 [in 2024 dollars; BNEF, 2025BloombergNEF — Adaptation & Resilience: The New Investment Imperative (2025)“Climate-related damages from fire, flood and storms cost the world’s largest economies $1.4 trillion in 2024, up from $150 billion in the year 2000”PDF · p. 1]
• Hidden tax: in the US alone, and in just the past year (from 05/2024 to 05/2025), costs reached nearly $1 trillion ($955 billion), or 3.2% of GDP. The main costs are disaster recovery, insurance premiums, government grants and costs arising from power outages. This hidden ‘tax’ drains funds from other sectors of the economy [Bloomberg, The Climate Economy Outlook, 2025Bloomberg — The Climate Economy 2025 Outlook“US climate-related costs reached a record $955 billion … representing more than 3% of gross domestic product”].
• All of these estimates are probably too low: actual losses to the global economy, including indirect losses and cascading impacts (business disruption, ecosystem damage and social costs), exceeded $2.3 trillion a year (more than 2% of GDP). This is more than 10 times the officially recorded direct losses (~$200 billion) on which many financial models are based. Disaster losses already cost far more than measures to prevent them would have cost [UNDRR, GAR, 2025]UNDRR — Global Assessment Report (GAR) 2025, Summary for Policymakers.

03.1 Physics of the +2 °C scenario

What does 2 °C mean?

A 2°C rise is not much—unless we are talking about your body temperature or the planet’s. Even a small increase in global temperature causes a nonlinear increase in the frequency and intensity of extreme events. In other words, warming from 1.5°C to 2.0°C will bring more risks than warming from 1.0°C to 1.5°C [IPCC AR6, 2023].

This is a shift to a climate regime similar to that of the early Pliocene, which the planet has not experienced for more than 3 million years [Hansen et al., 2025]. Natural ecosystems, agriculture and infrastructure are not adapted to such conditions. Many organisms cannot adapt to such rapid changes—doing so takes thousands of years of evolution.

Impacts of warming to +2 °C

This is what that world will look like:

• Natural disasters will become more intense and frequent, with more and more extreme weather events occurring in places where they were previously uncommon [IPCC AR6].
• Deadly heat will become the norm. In the planet’s temperate regions, it will far more often lead to excess mortality, while in southern regions it will regularly reach levels incompatible with life without artificial cooling [Penn State University ResearchPenn State — Humans can't endure temperatures and humidities as high as previously thought (2022)“actual maximum wet-bulb temperature is lower — about 31°C wet-bulb”; Raymond, C. et al., 2020Raymond et al. — The emergence of heat and humidity too severe for human tolerance (2020)“...a wet-bulb temperature (TW) of 35°C marks our upper physiological limit, and much lower values have serious health and productivity impacts… an upperlimit for survivability under sustained exposure, even with idealizedconditions of perfect health, total inactivity, full shade, absence ofclothing, and unlimited drinking water (9, 10)... severe mortality andmorbidity impacts typically occur at much lower values—for example, regions affected by the deadly 2003 European and 2010 Russian heatwaves experienced TW values no greater than 28°C (fig. S1). In theliterature to date, there have been no observational reports of TW exceeding 35°C and few reports exceeding 33°C (9, 11, 14, 15). ”].
• The water crisis will become global. Accelerated glacier melt and declining snow cover will lead to critical freshwater shortages for more than 1.5 billion people. Water will become a strategic resource whose price on local markets may exceed that of oil.
• Extreme fire weather conditions will occur almost every year. The likelihood of fires is tens of times higher [WWA, 2025World Weather Attribution (2025)“The event in today's climate is about a 1 in 10 year event, whereas in a 1.3°C cooler climate, it would be expected to occur once in every 100 years. ... The DSR is projected to become another 25% more intense and another nine times more likely.”PDF · p. 3].
• Yields of key crops will fall significantly. Global maize yields are projected to fall by 24%, and soybean yields by 5–10%. For wheat, losses in traditional agricultural regions will reach 20–30%. This is a systemic risk to global food security [Heikonen et al., 2025; Hultgren et al., 2025].
• Weather risks will become markedly less predictable. The familiar rhythm of weather will change: extremes are already moving beyond historical experience—becoming unprecedented not only in intensity and frequency, but also in timing and location. Such variability will make economic and everyday planning more difficult [IPCC, 2021IPCC AR6 WGI FAQ 11.2 — Will Unprecedented Extremes Occur As a Result Of Human-Induced Climate Change? (2021)“unprecedented, either in magnitude, frequency, timing or location”; de Vries et al., 2024de Vries et al. — Increasing extreme precipitation variability plays a key role in future record-shattering event probability (2024)“record-shattering probability is 15 times larger than in a world without climate change”; Swain et al., 2025Swain et al. — Hydroclimate volatility on a warming Earth (2025)“subseasonal ... whiplash have increased by 31–66% ... increases of 113% ... with 3 °C of warming”].
• The risk of triggering chain reactions (points of no return) will increase many times over. The likelihood of ice-sheet collapse or a shutdown of ocean circulation (AMOC) will no longer be negligible [Deutloff et al., 2025Deutloff et al. — High probability of triggering climate tipping points under overshoot (2025)“probability of equilibrium triggering of 62% … 39% for AMOC, 93% for GRIS, 96% for WAIS”; Stokes et al., 2025].

03.2 Physical risks → financial risks

Physical risks become financial risks

A 2°C rise poses a direct threat to global economic stability.

At the current level of technological development, there is a high risk of a food and water crisis that will affect every country to some degree [GlaMBIE Team, 2025; IPCC; Heikonen et al., Nature Food, 2025].

The world’s leading financial and scientific institutions warn that insurance markets could collapse in vulnerable parts of the world and that the financial system as a whole could be destabilised [Allianz, 2025Allianz — Rethinking climate adaptation for global resilience (2025)“certain assets effectively uninsurable”; First Street Foundation, 2025First Street — 9th National Risk Assessment: The Insurance Issue (2025)“private insurance companies are effectively labeling areas as uninsurable; property values will deflate”; EEA, 2024].

It is important to consider three amplification mechanisms:

1. Nonlinear damage: An economy may cope relatively easily with warming from +1.0°C to +1.2°C. But the shift to +2.0 °C could be catastrophic. Why?

   Infrastructure: Dams designed for a ‘100-year flood’ can withstand a modest increase in heavy rainfall. But once a certain threshold is crossed, they are breached, and damage increases not by 10% but severalfold.

   Agriculture: Up to a certain threshold, heat reduces crop yields gradually; once it is exceeded, losses rise disproportionately, rapidly reducing the resulting harvest.

   Labour productivity: Up to a certain threshold, heat merely slows people down. Beyond it, working becomes unsafe: at a wet-bulb temperature of around 31°C, overheating can begin after just 60–90 minutes of moderate exertion [Penn State University ResearchPenn State — Humans can't endure temperatures and humidities as high as previously thought (2022)“actual maximum wet-bulb temperature is lower — about 31°C wet-bulb”; Raymond, C. et al., 2020Raymond et al. — The emergence of heat and humidity too severe for human tolerance (2020)“...a wet-bulb temperature (TW) of 35°C marks our upper physiological limit, and much lower values have serious health and productivity impacts… an upperlimit for survivability under sustained exposure, even with idealizedconditions of perfect health, total inactivity, full shade, absence ofclothing, and unlimited drinking water (9, 10)... severe mortality andmorbidity impacts typically occur at much lower values—for example, regions affected by the deadly 2003 European and 2010 Russian heatwaves experienced TW values no greater than 28°C (fig. S1). In theliterature to date, there have been no observational reports of TW exceeding 35°C and few reports exceeding 33°C (9, 11, 14, 15). ”] Productivity drops not by 5% but severalfold—or, in some sectors, work stops altogether.

2. The ‘accumulation’ effect and the depletion of resources needed for recovery:

   A single shock: A country can cope with one major flood by drawing on reserves and borrowing.

   A series of shocks: if a megadrought strikes two years later and a hurricane another year after that, the country may lack both the financial and material resources needed for recovery. Each successive shock causes more damage because it strikes an already weakened system. Models from NGFSA group of central banks and supervisors, including the ECB and the Federal Reserve, established to help green the financial system show that damage from a single shock can affect the economy for up to 10 years.

3. Compound risks: As warming advances, simultaneous disasters in different parts of the world become more likely (for example, drought affecting the three leading grain exporters). The resulting damage does not add up; it multiplies, causing global supply chains to collapse and triggering a food crisis.

03.3 Climate tax · forecast for +2 °C and +3 °C

Climate tax: forecast

Looking ahead, the slowdown in growth at warming levels of +2 °C and +3 °C will become even more pronounced:

Important considerations:

1. Aggregate figures conceal substantial disparities in damage: a 17% loss in global GDP may mean a 50% loss of GDP for some countries—for example, those in southern regions.
2. These projections should be treated as a lower bound. This estimate is ‘inherently conservative’ (it understates, or provides a lower bound for, the actual impact). It omits important factors such as the impacts of heatwaves, sea-level rise, tropical cyclones and points of no return, as well as cross-regional ‘spillover’ effects that can significantly amplify the overall impact, and non-market damage such as harm to ecosystems and human health [PIK revised version, 2025].
3. NGFSA group of central banks and supervisors, including the ECB and the Federal Reserve, established to help green the financial system: the estimate is based on PIK models and excludes extreme disasters (major hurricanes, mega-fires and rare floods of exceptional severity), chain reactions in the financial system (domino effects and financial panic), an insurance-market crisis, supply-chain disruptions, non-market losses (ecosystem degradation, harm to human health and forced migration—all of which are already occurring), the crossing of points of no return, and compound risks—that is, interactions between climate shocks and non-climate shocks (pandemics, other financial crises and wars). At the same time NGFSA group of central banks and supervisors, including the ECB and the Federal Reserve, established to help green the financial system acknowledges that these factors have ‘significant macroeconomic implications’ and pose a risk to financial stability.

03.4 A new landscape for investors

This fundamentally changes the investment landscape

1. A powerful systemic factor: Evidence shows that the global economy is subject to a persistent, powerful drag. Climate change must be treated as a fundamental macroeconomic factor and monitored as closely as the Federal Reserve’s actions—with the understanding that this ‘regulator’ will never cut rates.
2. Forecasting errors: Long-term forecasts of GDP and GRP (gross regional product) growth, which underpin financial models, are highly likely to continue being systematically revised downwards. This is because current models are slow to incorporate new scientific evidence, poorly capture—or entirely omit—the accelerating pace of climate change, interconnections and cascading impacts, and often ignore low-probability but catastrophic events (such as points of no return).
3. Non-diversifiable risk: This newly quantified macroeconomic risk is systemic and difficult to hedge through diversification. It is forcing investors and regulators to reassess the risk premium for entire countries and sectors, which may raise the cost of capital for everyone.
4. Threat of systemic failure: Today, climate change is seen as slowing growth, but as it intensifies, it poses a real threat of a debt crisis, the collapse of social systems and investment paralysis.

The inevitability of change

The global economy is already locked into a 17% reduction in income (with warming to +2 °C) because of historical carbon emissions and socioeconomic inertia [PIK revised version, 2025].

05.1 The banking system's response

Banks acknowledge the 2–3 °C scenario

An analysis of documents from 2024–2025 reveals a fundamental shift in corporate planning: from attempts to prevent climate catastrophe to preparing for its consequences. The findings draw, among other sources, on OMFIF (the independent forum for central banks, sovereign wealth funds and think tanks) and research by the University of Oxford on sustainable finance.

• From the report BISThe bank for the world's central banks (the bank for the world's central banks), July 2025: ‘regulators are increasingly calling on banks to recognise physical climate risk as a new factor in their risk universe and incorporate it into credit risk management policies. A number of national financial authorities have explicitly set supervisory expectations that banks will adjust their risk management practices in response to climate change’.
• Morgan Stanley officially stated in March 2025: ‘We now expect a 3 °C world’, citing ‘recent setbacks in global decarbonisation efforts’. This forecast was included in an equity investment report on air-conditioning manufacturers.
• JPMorgan Chase announced the start of a ‘new climate era’ in early 2025, stating explicitly that ‘climate change is an economic challenge’ and requires climate considerations to be integrated into ‘day-to-day decision-making’. The bank developed its own CAF system to assess clients for climate risks.
• IIF (an international financial institution representing more than 400 of the world's largest banks) issued a formal statement to the financial sector, putting its position in bold: ‘The world is not on track to limit the temperature rise to below 2 °C’ (February briefing, 2025) [IIF, 2025]IIF — Sustainable Finance Monitor: Can 1.5 Be Kept Alive? (2025)“The world is not on track to limit temperature rise below 2°C – and limiting warming 1.5°C is almost certainly unachievable, without a major step change in policy ambition”PDF · p. 3.
• NGFSA group of central banks and supervisors, including the ECB and the Federal Reserve, established to help green the financial system (a consortium of the world's central banks, including the ECB and the Federal Reserve) published new official projections in November 2024: under ‘current policies’, the world will reach 2 °C and then 3 °C of warming, while economic damage will be three times higher than previously thought.

Systemic risk: banks are unprepared

The main obstacles are limited risk-modelling capabilities and a lack of data with which to assess these risks.

• BISThe bank for the world's central banks acknowledges the serious difficulty of assessing climate risks; the IIF also notes a lack of granular, comparable data for assessing ESG and climate risks [BIS, Incorporating climate risks, 2025BIS — Incorporating physical climate risks into banks' credit risk models (2025)“lack of data and risk-modelling capabilities … absence of generally accepted industry models”; IIF, 2025IIF — Response to EBA consultation on amended Pillar 3 disclosure requirements for ESG risks (2025)“data points that are hard to reliably source and/or are inconsistent with similar data points required under the CSRD or the EU Taxonomy”“This lack of detailed data makes it difficult for financial institutions to calculate these emissions on their own”“detailed locations of counterparties and activities are not always readily available”].
• Banking models are falling short, leading to ‘hidden’ credit losses: an analysis of Hurricane Sandy found that misjudging climate risk resulted in $68 million in unexpected losses from a single event alone [FSF, The 13th National Risk Assessment, 2025First Street — 13th National Risk Assessment: Climate, the 6th C of Credit (2025)“produced ‘hidden’ credit losses … $68 million in unanticipated unpaid principal and interest”].
• In 2024, the US Federal Reserve published the results of a climate stress test of the 6 largest banks (Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo): it ‘identified substantial data gaps and modelling challenges’; the banks struggled to assess the vulnerability of their business models [FED, 2024]Federal Reserve — Pilot Climate Scenario Analysis: Results (2024).
• Stress tests by the ECB and the Bank of England identified ‘key data gaps’: ‘most banks still have a long way to go’ [OMFIF, 2025OMFIF — Persistent data gaps pose hurdles for banks' climate strategies (2025)“most banks still have a long way to go … flagged data gaps as a key hurdle”]. Calculations using aggregated firm-level data led climate losses to be underestimated by as much as 70% [EEA/EUCRA, 2024EEA — European Climate Risk Assessment, EUCRA (2024)“physical climate risks to the European banking system are still underestimated … underestimation of climate-related losses of up to 70%”].
• NGFSA group of central banks and supervisors, including the ECB and the Federal Reserve, established to help green the financial system tripled its own estimate of economic damage in just 1 year and acknowledges that even its models lag behind physical reality [NGFS, 2024]NGFSA group of central banks and supervisors, including the ECB and the Federal Reserve, established to help green the financial system — High-level overview of NGFSA group of central banks and supervisors, including the ECB and the Federal Reserve, established to help green the financial system Scenarios, Phase V (2024)“Global GDP losses rise … to in between 7% and 15% in 2050 in Phase V”PDF · p. 2.

What are climate risks?

For banks, climate risk primarily means a deterioration in borrowers' ability to pay. Borrowers face two main types of risk [BIS, Incorporating physical climate risks into banks' credit risk models, 2025]BISThe bank for the world's central banks — Incorporating physical climate risks into banks' credit risk models (2025)“physical risks in banks’ capital requirements, loan loss provisions, pricing of loans … RWA rises as much as by 20%”:

1. ‘Physical’ risk — damage to assets from natural disasters and extreme weather. This includes the effects of heat on labour, as well as smoke and air pollution (see Part IV).
2. ‘Transition’ risk — the costs of the shift to the green economy needed to mitigate further impacts: changes in public policy, legislation, regulation and taxation; technological shifts; and changes in market conditions and customer preferences.

05.2 The insurance industry's response

The insurance industry: ‘uninsurable zones’

Banking models show only the ‘tip of the iceberg’. Documents from the world's largest insurers provide a clearer picture of what is happening ‘below the surface’ and why it is potentially catastrophic:

• Insured losses have risen 3.6-fold over the past 30 years due to the increase in climate-related and natural disasters [Capgemini and Efma, 2022World Property and Casualty Insurance Report 2022“Natural catastrophe events have led to a 3.6 times increase in insured losses and a 2 times increase in uninsured losses over the last 30 years”PDF].
• Economically significant ‘uninsurable zones’ are emerging and expanding rapidly —regions where private insurance ceases to function as a risk-management tool [UNU-EHS, 2023UNU-EHS — An uninsurable future? The insurance protection gap and climate change (2023)“certain areas may become effectively ‘uninsurable’ … risk tipping point of uninsurability”].
• ‘Uninsurable’ zones are already a reality. In California and Florida, more than 2 million households have lost access to private insurance in recent years and have been forced into state-run ‘last resort’ programmes, which are themselves in an extremely precarious financial position [FSF, 2025First Street — 9th National Risk Assessment: The Insurance Issue (2025)“dramatic pullout of coverage across California, Florida, and Louisiana … insurer of last resort … the largest insurer in the state”PDF · p. 5; Marsh McLennan, 2024; Capgemini and Efma, 2022World Property and Casualty Insurance Report 2022“Several leading insurers pulled out of the California home insurance market”PDF]. In Greece, insurers have already classified substantial parts of the country as ‘red zones’ [WWA, 2025World Weather Attribution (2025)“large parts of the country have already been classified as ‘red zones’ by insurers, limiting access to affordable property insurance”PDF · p. 32]. In Australia, more than 520,000 homes could lose insurance over the next 5 years [Marsh McLennan, 2024]UN — An uninsurable future? (2023)“approximately 520,940 homes are predicted to be uninsurable in Australia by 2030”PDF · p. 5. A growing number of locations are becoming uninsurable, while the risk of uninsurability is rising in other regions of the world as well [Capgemini, 2023Weathering the Climate Change Storm“These catastrophe-induced increases, combined with regulatory constraints that prevent insurers from adjusting prices at pace, lead to more locations becoming uninsurable ... The risk of uninsurability is growing in other regions of the world as well...”PDF · p. 4].
• In some regions, simply buying an insurance policy is no longer enough: rising climate risks are making cover increasingly expensive, difficult to obtain or potentially impossible without adaptation. Companies therefore need not only to transfer risk to insurers but also to reduce their own physical vulnerability. Climate risk must be embedded in core business strategy: protecting physical assets, changing operating processes, assessing the return on adaptation measures and accounting for climate vulnerability in supply chains [Marsh McLennan, 2023Building a Climate-Resilient Future“insurance becomes even more unaffordable and unavailable ... risks in certain regions to levels that are no longer insurable”PDF; Marsh McLennan, 2024How a holistic risk approach increases resilience“existing risk management techniques may fall short in addressing climate change ... A holistic view of risk is essential ... return on investment assessments for adaptation measures ... visibility into supply chain climate exposure”PDF; Marsh McLennan, 2025Marsh Climate Resilience and Adaptation Hub“Driving adaptation to a changed climate can avoid business disruption ... protect your physical assets ... explore a range of resilience measures”Web].

‘We are rapidly approaching temperature levels—1.5 °C, 2 °C, 3 °C—at which insurers will no longer be able to offer cover for many of these risks. The maths does not work: the required premiums exceed what people or companies can afford. This is already happening’

AllianzOne of the world's largest financial services and insurance groups · public statement by a board member, 2025

Underestimation of physical risks

The problem is compounded by the vast gap between official—and market—risk assessments and assets' actual vulnerability to fires, floods, droughts, hail, hurricanes and mudslides. Official maps, such as those of FEMA, the US Federal Emergency Management Agency, which guide authorities, developers and buyers, are outdated and do not reflect the real risks of a changed climate [Marsh McLennan, 2025Marsh McLennan — 2025 State of Flood Report“increase in flooding events, even in areas previously considered low risk”; FSF, 2025First Street — 8th National Risk Assessment: The Precipitation Problem (2023)“these formerly rare events are now occurring as often as every 5 or 10 years … data that do not reflect current rainfall conditions”].

• Areas that were safe 10 years ago are becoming high-risk today; millions of ‘safe’ properties are already directly threatened. This is a ‘blind spot’ of underestimated risk on the balance sheets of owners and banks.
• The example of Hurricane Helene (2024): in the region of North Carolina hit by catastrophic flooding, less than 2% of residential properties had flood insurance—a stark gap between the official risk assessment and actual vulnerability [Aon, Climate and Catastrophe Insight, 2025Aon — 2025 Climate and Catastrophe Insight“less than 2 percent of all residential structures … covered under the National Flood Insurance Program”].
• By 2055, 84% of all US neighbourhoods could face falling property values due to climate risks; total losses could reach $1.47 trillion [FSF, Property Prices in Peril, 2025First Street — Property Prices in Peril: 12th National Risk Assessment (2025)“70,026 neighborhoods (84% of all census tracts) … $1.47 trillion in net property value losses”].

Public response: migrating towards risk

The situation is further exacerbated because people—and the market—continue to ignore climate risks. Economic development is concentrating in places people need to leave.

• Homes continue to be built where they should not be, often on a large scale [Swiss Re, 2025].
• In the United States, migration is not away from risk but directly towards it: people are leaving expensive but safer states such as California and New York and moving in large numbers to the highest-risk states—Florida, Arizona and Texas. Affordable housing and jobs remain the main drivers.
• Population growth and the concentration of assets continue in the highest-risk areas—from rapid development in hurricane-prone Florida to urban growth in regions exposed to severe convective storms [Aon, Climate and Catastrophe Insight, 2025].

This trend does more than increase the number of future victims: it systematically concentrates future financial losses and ‘hidden credit risks’ in geographic danger zones [FSF, 2025; Aon, 2025].

Uninsured risk: a $1.8 trillion ‘protection gap’

The $1.8 trillion ‘protection gap’ is effectively the ‘dark matter’ of the financial system: risk that is neither recognised, assessed nor managed, creating enormous systemic vulnerability [UNU-EHS, 2023]. Emerging economies have vast protection gaps (China 94%, India 93%, South Africa 83%), while the gaps are smaller in advanced economies (UK ~21%, Australia ~30%, Canada ~35%) [Allianz Research, Climate Adaptation Report, 2025]. In Greece, the gap exceeds 80%—only 18.2% of homes are insured [WWA, 2025World Weather Attribution (2025)“In March 2025, only 18.2% of residences were insured”PDF · p. 31]. The case of Italy: an 83% gap, 75% of homes in risk zones, and 98% of seismic losses in 1980–2021 uninsured.

Systemic risk: insurers are unprepared

• In 2023, 56% of insurance executives ranked climate risks among their top three concerns [Capgemini, 2023Weathering the Climate Change Storm“According to our 2023 survey, climate risk urgency escalated, with 56% of the senior executives we surveyed saying climate events were among their top three concerns, up from 44% in 2022.”PDF · p. 3].
• The historical risk-assessment models on which the insurance business is built are ceasing to work, creating an industry-wide ‘crisis of confidence in the ability to predict losses’ [Frank, 2023; UNU-EHS, 2023UNU-EHS — An uninsurable future? The insurance protection gap and climate change (2023)“using historical data to feed catastrophe models … a crisis of confidence around the ability to predict loss”].
• As natural disasters become more frequent and severe, insurers find it increasingly difficult to price risk correctly into policies. Insurers are unprepared for the current volatility, and when risk cannot be assessed accurately, they stop offering policies [Capgemini, 2024World Property and Casualty Insurance Report 2024“The P&C insurance risk landscape is evolving rapidly as the frequency and severity of natural catastrophe (NatCat) events... increase underwriting complexity ... Carriers are unprepared for today’s rising claims and costs, NatCat losses ... Meanwhile, insurers terminate policies when they cannot accurately price risks ... Insurability challenges are driven by underlying risks, not insurance prices.”PDF].
• The number of severe and frequent disasters worldwide will double by 2040, threatening the very viability of insurance as an option for many [UNU-EHS, 2023UNU-EHS — An uninsurable future? The insurance protection gap and climate change (2023)“number of severe and frequent disasters forecast to double globally by 2040 … threatening the viability of insurance”].
• Over 2017–2024 alone, insurance spending as a share of total US housing costs rose by 66%, turning insurance into a ‘second mortgage’ [FSF, 2025]First Street — 12th National Risk Assessment: Realty (2025)“Rapid increases in insurance costs … 66%”PDF · p. 8. Even after the sharp increase in insurance premiums, US housing still underprices climate risk. Premiums will continue to rise [Bloomberg / Swiss Re, 2024US home insurance still priced too low for climate risk“US home insurance still priced too low for climate risk ... premiums will have to climb further ... he agreed prices will continue their upward trend”Web].
• Insurers' net premiums fell below zero in 2017 and approached zero three more times in recent years: the industry periodically operates at a loss, making further price increases or withdrawals of cover extremely likely [Bloomberg, The Climate Economy Outlook, 2025]Bloomberg — The Climate Economy 2025 Outlook.

06.1 Insurer's warning · AllianzOne of the world's largest financial services and insurance groups, 2025

A board member of AllianzOne of the world's largest financial services and insurance groups, one of the world's largest insurers, explicitly warns of a potential cascading financial crisis that starts with the withdrawal of insurers and leads to a collapse in the mortgage market and banking instability:

‘This is not a one-off market adjustment. This is a systemic risk that threatens the very foundation of the financial sector. If insurance becomes unavailable, other financial services become unavailable too. A home that cannot be insured cannot be mortgaged. No bank will lend against a property that cannot be insured. Credit markets freeze. This is a credit crunch caused by climate change.

This applies not only to housing, but also to infrastructure, transport, agriculture and industry. The economic value of entire regions—coastal, arid and wildfire-prone—will begin to disappear from financial balance sheets. Markets will reprice these assets rapidly and harshly. This is what climate-driven market failure looks like.’

Günther Thallinger · board member of AllianzOne of the world's largest financial services and insurance groups, 2025

06.2 Crisis mechanism

Crisis mechanism: a 5-step chain

BISThe bank for the world's central banks, the UN, EEAEuropean Environment Agency and AllianzOne of the world's largest financial services and insurance groups confirm that, over the past few years, physical risks have moved from a niche concern for insurers to a systemic risk factor for financial markets. The collapse of insurance is a direct mechanism leading to a financial crisis [UNU-EHS, 2023UNU-EHS — An uninsurable future? The insurance protection gap and climate change (2023); BIS, 2025BIS — Incorporating physical climate risks into banks' credit risk models (2025)“Climate change presents a systemic risk”; EUCRA, 2024EEA — European Climate Risk Assessment, EUCRA (2024)“from a niche domain of (re)insurers into a systemic risk factor”].

The parallel with 2008 and capital requirements

Physical climate risks reach a bank's balance sheet and income statement through several channels: disasters incapacitate borrowers' assets, reducing collateral values and income from damaged properties; because climate events affect many borrowers simultaneously, increasing default correlation, a bank with lending concentrated in a risk zone can suffer substantial losses (making regional banks particularly vulnerable) [BIS, 2025BIS — Incorporating physical climate risks into banks’ credit risk models (2025)“Physical risks are transmitted to a bank’s balance sheet and P&L through different channels. For example, natural disasters... affect households and corporate borrowers by impairing their fixed assets... This, in turn, impacts the creditworthiness of the obligors by decreasing the value of collateral...”“Since climate-driven events commonly affect multiple borrowers at the same time, thus driving up correlation of defaults in the loan portfolio, a bank may incur in significant losses if it has a concentration of credit exposures...”PDF].

This resembles the 2008 crisis, but the root cause is not a temporary problem with toxic securities; it is the permanent physical vulnerability of assets that are gradually dropping out of the economy. This is why BISThe bank for the world's central banks and the ECB propose integrating climate risks into prudential rules—that is, increasing banks' capital requirements (RWA) [BIS, 2025BIS — Incorporating physical climate risks into banks’ credit risk models (2025)“...standard setting bodies and financial regulators have increasingly urged banks to recognise physical climate risk as a new factor in their risk space and internalise it in their credit risk management policies.”“...account for physical risks in banks' capital requirements, loan loss provisions...”“...Model RWA, when physical risk-related corrections are included, increases by around 7.9% [up to 20%] compared to the original calculations...”PDF]. This directly hits banking-sector profitability, forcing banks either to raise interest rates or reduce lending.

Quantifying the risk to banks:

1. Historical data: every 1% increase in insurance premiums causes the mortgage default rate to rise by 1.05 percentage points [FSF, The 13th National Risk Assessment, 2025First Street — 13th National Risk Assessment: Climate, the 6th C of Credit (2025)“Every 1 percent-point increase … 1.05 percentage-point rise in foreclosure rates”].
2. Historical data: for the most vulnerable group—damaged homes in river flood zones—the number of mortgage defaults rises by 62.8% compared with the pre-flood period [FSF, 2025First Street — 13th National Risk Assessment: Climate, the 6th C of Credit (2025)“properties saw a 62.8% increase … Riverine (Fluvial)”; Aon, 2025].
3. Nature degradation: 75% of loans to EU companies are exposed to risks from nature degradation (clean water for production and for cooling factories and data centres, pollination for agriculture, and timber for construction) [ECB, 2023]ECB — Surface water scarcity puts ~15% of euro-area output at risk (2025)“72% of euro area firms are critically dependent on ecosystem services … three-quarters of all corporate bank lending”.
4. FSF projection model: over the next 10 years, banks' annual losses from climate-related defaults will increase more than 4-fold (from $1.2 billion to $5.4 billion), accounting for almost 30% of all mortgage credit losses [FSF, 2025First Street — 13th National Risk Assessment: Climate, the 6th C of Credit (2025)“$1.21 billion in bank losses in 2025 … rise credit losses to $5.36 billion”].
5. Projection model of BISThe bank for the world's central banks (a loan secured on commercial property in Alabama, using the current probability of a severe hurricane in 2025): probability of default increased by 12%; loss given default rose from 10% to 24.8%; required capital increased by 8%, 15.5% and 22%, depending on the scenario [BIS, 2025].

Consequences for ‘uninsurable zones’

‘Uninsurable zones’ are not merely a problem for homeowners. They trigger a freeze in mortgage lending, rising credit risks for the banking system and the long-term economic decline of entire regions. These cascading, systemic effects are generally excluded from standard risk-assessment models.

Regional economic decline: affluent households and businesses leave ‘uninsurable’ zones; the cost of capital rises, investment falls and the tax base shrinks; disasters recur without the resources needed for recovery, turning regions into depressed, subsidy-dependent areas that drain the state's overall budget.

Growing social inequality: the most vulnerable groups cannot leave and remain in deteriorating, increasingly dangerous areas; the loss of insurance and growing number of disasters exacerbate stress and mental-health problems.

06.3 · Systemic risk The state as the backstop

The state as the backstop

Some argue that the state will step in where insurers withdraw. But this assumes that the state—that is, the taxpayer—can afford to do so. That assumption is already breaking down. Covering the cost of three or four major wildfires or floods in a single year pushes public budgets to the limit. If several costly events occur in quick succession—as climate projections indicate—no government can realistically cover the damage without severe austerity or collapse. Examples include Germany's €30 billion in relief for flood victims in 2021 and Australia's rising disaster-response costs in 2020–2023.

Günther Thallinger · board member of AllianzOne of the world's largest financial services and insurance groups, 2025

To put the scale in perspective

From ‘individual disasters’ to ‘permanent crisis’

Hurricane Helene struck Florida's Big Bend region in autumn 2024, becoming the strongest hurricane in the region's history. 13 days later, Hurricane Milton hit Florida, becoming one of the most intense Atlantic hurricanes. This set a record for the shortest interval between major hurricanes in Florida. Combined damage was about $113 billion [NOAA, 2025NOAA — Hurricane Costs“strongest hurricane on record to strike the Big Bend region of Florida”“Helene’s total costs were $78.7 billion.”“Total costs for Milton were $34.3 billion.”; NHC, 2025NHC — Hurricane Milton Tropical Cyclone Report“one of the strongest hurricanes of record in the Atlantic basin”“This ties Hurricane Rita of 2005 for the fourth-lowest minimum central pressure in an Atlantic hurricane.”; Moody's RMS, 2024Moody's RMS — Hurricane Milton: Live blog“Milton made landfall 13 days after Helene”“the fewest number of days between major hurricane landfalls in Florida on record”]. Three months later, the Los Angeles fire added another $65 billion to total US losses, making it the costliest fire to date [Bloomberg, 2025Bloomberg — The Climate Economy 2025 Outlook“Los Angeles wildfires in January 2025 causing $65 billion in economic costs”; Munich Re, 2026Munich Re — Wildfires and bushfires“The costliest wildfires to date ... struck the Los Angeles area in January 2025”].

06.4 Systemic risk

Climate is the world's No. 1 threat

The World Economic Forum (WEF) report «The Global Risks Report 2026» puts the global expert view into perspective.

Long-term threat: Over a 10-year horizon, the top three positions in the ranking of the most severe global risks (by impact) are occupied exclusively by environmental threats. Their potential damage is rated more highly than that of AI or geoeconomic confrontation [WEF, 2026World Economic Forum — The Global Risks Report 2026Top 3 severe risks over 10 years: 1. Extreme weather events. 2. Biodiversity loss and ecosystem collapse. 3. Critical change to Earth systems.PDF · p. 9]:

• 1st place. Extreme weather events.
• 2nd place. Biodiversity loss and ecosystem collapse.
• 3rd place. Critical changes to Earth systems (‘tipping points’ or ‘points of no return’).

Short-term threat: Even over a 2-year horizon, extreme weather events firmly occupy fourth place among threats to the world.

Climate change remains the leading overall risk for both experts and the general public [AXA, Future Risks Report, 2025]AXA — Future Risks Report 2025“Climate change remains the top risk overall for both experts and the general population.”.

06.5 Underestimation of systemic risk

Underestimation of systemic risk

Regulators, central banks and the largest insurers have independently reached the same conclusion: climate change is a systemic risk to the entire financial system.

• The very nature of these risks means that their impacts are uncertain. At the same time, decision-makers need an assessment of the worst-case scenario—that is, the most severe outcome that could plausibly occur [Chatham House, 2021Chatham House — Climate change risk assessment (2021)“The very nature of risks means their impacts are uncertain. At the same time, decision-makers require an evaluation of the worst-case scenario – i.e. the most severe outcome that might plausibly occur.”].
• Climate change poses a significant systemic risk to financial stability [BIS, Climate-related risk drivers, 2021BIS — Climate-related risk drivers and their transmission channels (2021)“broader financial stability implications … financial stability risks”].
• Climate risks threaten financial stability through asset depreciation, rising losses and economic disruption [EEA, 2024EEA — European Climate Risk Assessment, EUCRA (2024)“compromise … financial stability … systemic financial shock”].
• Catastrophe risk is becoming an increasingly systemic threat to financial stability worldwide [UNDRR, GAR, 2025]UNDRR — Global Assessment Report (GAR) 2025, Summary for Policymakers“systemic challenge that affects financial stability”.
• Nature-related risks may have significant macroeconomic consequences and are a source of risk to financial stability [NGFS, 2024]NGFSA group of central banks and supervisors, including the ECB and the Federal Reserve, established to help green the financial system — Synthesis report on the greening of the financial system (2024)“nature-related financial risks could have significant macroeconomic implications … a source of risks relevant for financial stability”.
• International cooperation is needed to address global problems, yet the world is instead moving towards increasing polarisation and fragmentation [WEF, 2025WEF — The Global Risks Report 2025“the global outlook is increasingly fractured … widespread societal and political polarization”].
• Historical trends have been irreversibly disrupted: the world has entered a new phase of structural transformation in which the main drivers are not conventional business cycles but ‘mega forces’. The transition to a low-carbon economy is one of five mega forces driving the global economic transformation. This transition requires investment potentially comparable in scale to the Industrial Revolution [BlackRock, Global Outlook, 2025BlackRock — 2025 Global Outlook“Historical trends are being permanently broken”“AI and the low-carbon transition requiring investment potentially on par with the Industrial Revolution”“The energy transition – intertwined with mega forces like AI and geopolitical fragmentation”; BlackRock, Low-carbon transition, 2025BlackRock Investment Institute — The low-carbon transition (2025)“The transition to a low-carbon economy – one of the five mega forces that we track”“the low-carbon transition is one of several mega forces driving a global economic transformation”].
• The world has entered an era of ‘polycrisis’—multiple interconnected global crises, including climate change, geopolitical instability and social tensions, that amplify risks in unprecedented ways [WEF, 2025WEF — The Global Risks Report (2025)“the interconnected nature of risks and of their compounding effects”; AXA, 2025AXA — Foresight Report (2025)“We are entering a ‘poly-crisis’ world, where risks are increasingly interconnected”].

06.6 Supply chains

Supply chains: diversification is no panacea

A working paper by BISThe bank for the world's central banks quantifies the ‘domino effect’ in the real economy, showing that climate risk is not a local problem but a networked virus spreading through the arteries of the global economy. A climate shock, such as a drought, in one region causes GDP to fall in another geographically distant region if the two have trade links. Municipalities whose customers are affected by drought experience GDP growth declines of 1–2 percentage points [BIS, Supply chain transmission of climate-related physical risks, 2025].

• Impacts are felt everywhere: the cascading effect leads to lower imports and worse labour-market outcomes—higher unemployment and lower wages—in regions not directly affected by the disaster.
• Even ‘moderate’ shocks are dangerous: most damage is transmitted through supply chains not by rare megadisasters, but by moderate, more frequent anomalies such as a ‘minor’ drought. The risk is persistent, not episodic.
• Sector vulnerability: agriculture is vulnerable to both local and distant shocks; industry is more resilient to moderate shocks but suffers severely from intense disasters affecting suppliers; the service sector is affected mainly by local shocks.

NGFSA group of central banks and supervisors, including the ECB and the Federal Reserve, established to help green the financial system models probable damage in the coming years: global GDP falls by as much as 1.0% in 2026 following extreme events in Europe and by up to 2.1% in 2027 following events in Asia. In some scenarios, persistent GDP losses reach 2.8% and unemployment rises by up to 1.7 percentage points in 2028. Supply-chain ‘bottlenecks’ can cause global GDP losses of more than 3%, while regional losses peak at 12.5% of GDP in Africa [NGFS, Short-Term Scenarios, 2025].

06.6.1 An actuarial perspective

Climate as a solvency issue

Actuaries are financial analysts who calculate the risk of rare but devastating events for insurers and pension funds. They have applied this approach to climate and nature: the system must withstand not the average scenario, but its ‘tail’—a low-probability catastrophe.

The urgent need for risk management

‘We use the example of climate risk assessment to show why and how decision-makers may inadvertently have accepted much higher levels of risk than they assume’ [Planetary Solvency, 2025IFoA & University of Exeter — Planetary Solvency: finding our balance with nature (2025)"We use the case study of climate change risk assessments to highlight why and how policymakers may have inadvertently accepted much higher levels of risk than they think."PDF · p. 10].

The target «net zero 2050» scenario provides only a 50% chance of keeping warming below 2 °C. This scenario is the main climate target for most governments and many companies worldwide: it assumes that global CO₂ emissions reach net zero by 2050. [NGFS Scenarios PortalNetwork for Greening the Financial System — NGFS Scenarios Portal"Net Zero 2050 limits global warming to 1.5°C through stringent climate policies and innovation, reaching global net zero CO2 emissions around 2050."NGFS Scenarios Portal · Net Zero 2050 scenario; Climate Action TrackerClimate Action Tracker — CAT net zero target evaluations"around 145 countries had announced or are considering net zero targets""The countries cover close to 77% of global emissions."Climate Action Tracker · 2025; SBTi Corporate Net-Zero StandardScience Based Targets initiative — Corporate Net-Zero Standard"provides companies with the guidance and tools needed to set science-based targets aligned with reaching net-zero emissions by 2050 at the latest."SBTi · Corporate Net-Zero Standard].

Actuaries point to a logical inconsistency: society and business accept an enormous 50% risk of global climate ruin, while, by comparison, the legally permitted risk of an insurer becoming insolvent is just 0.5% [Planetary Solvency, 2025IFoA & University of Exeter — Planetary Solvency: finding our balance with nature (2025)"This probability of failure is very high when compared to … society's appetite for insurance company failure, which is set at 0.5%, a one in 200 year chance."PDF · p. 22].

Moreover, the world is not yet following even this pathway. If current trends continue, warming could reach 2.5–3 °C or more [NGFS Scenarios PortalNetwork for Greening the Financial System — NGFS Scenarios Portal"Under the NGFS Current Policies Scenario, global warming of 1.5 °C could be reached in the 2030s, 2 °C around 2050 and 3 °C around 2100.""If no further measures are introduced, 3 °C or more of warming could occur by 2100."NGFS Scenarios Portal · Current Policies scenario]. Yet such projections are based on average estimates, while an overlooked extreme-warming scenario of 4.5 °C or more has an 18% probability.

06.6.2 Climate tail risks

Damage to GDP rises non-linearly

Between +1,5 °C and +2 °C climate damage begins to exceed total annual global GDP growth (about 3% per year) [Parasol Lost, 2026IFoA & University of Exeter — Parasol Lost: Recovery plan needed (2026)"climate damages increasing rapidly above 1.5°C of warming and overwhelming the global GDP growth rate of 3% per annum, between that temperature and 2°C of warming."PDF · p. 20]. Beyond that, losses accelerate: about 30% of GDP at +3 °C and up to 80% at +4 °C [Climate Scorpion, 2024IFoA & University of Exeter — Climate Scorpion: the sting is in the tail (2024)"around 30% GDP loss occurs at 3°C of warming, compared with 80% GDP loss using the 4°C ruin parameterisation.""this is purely an illustrative example."PDF · p. 28]. These mathematical damage models are intended to illustrate the dynamics of rapidly compounding losses, not to provide a precise economic forecast.

06.6.3 Breaching planetary boundaries

7 of 9 boundaries breached—the risk is irreversible

‘Planetary boundaries’ are safe limits for nine Earth systems, including climate, freshwater and biosphere integrity. By 2025, 7 of the 9 had been breached, compared with 6 in 2023 [Tipping into the wild unknown, 2026IFoA & Anglia Ruskin University — Planetary Solvency: Tipping into the wild unknown (2026)"9 boundaries assessed / 7 crossed"PDF · p. 10 (Figure 1)]. The key difference from ordinary risk is that recovery beyond a tipping point cannot be assumed: this is ‘not a risk of volatility, but of irreversibility’ [Tipping into the wild unknown, 2026IFoA & Anglia Ruskin University — Planetary Solvency: Tipping into the wild unknown (2026)"Beyond a tipping point, recovery cannot be assumed to be possible … The risk is not just volatility, it is irreversibility."PDF · p. 9]. Breaching these limits deprives humanity of a safe operating space and sharply increases the risk of sudden ecosystem collapse [HM Government, 2025Global biodiversity loss, ecosystem collapse and national security (2025)“As of 2023, six boundaries have been crossed: (1) biosphere integrity... (6) novel entities...”PDF · p. 6]. Many of nature's services are irreplaceable: they cannot simply be ‘bought back’ [Planetary Solvency, 2025IFoA & University of Exeter — Planetary Solvency: finding our balance with nature (2025)"Ecosystem services are often non-substitutable … their loss undermines economic production."PDF · p. 11].

Projection if current trends continue

Each risk is plotted on two axes—‘how severe’ (from ‘limited’ to ‘extreme’) and ‘how likely’—showing its position in 2025 and trajectory towards 2050.

Where we are in 2025. The risk position rose sharply over the year and moved beyond acceptable levels. Climate is at the ‘severe’ level; nature is expected to reach ‘severe’ in the near term. Social fragmentation is growing, with active conflicts, geopolitical tension and pressure on vulnerable states. Economic losses and mortality remain ‘limited’ for now.

Where we are heading. The trajectory pushes every risk further beyond acceptable levels; breaches of risk tolerance are likely. Immediate policy action is needed to reduce the risk of ‘catastrophic’ impacts or worse—within this century and possibly well before 2050 [Global Tipping Points: Planetary SolvencyGlobal Tipping Points — Planetary Solvency Dashboardglobal-tipping-points.org].

By dimension: current position and trend towards 2050 [Global Tipping Points: Planetary SolvencyGlobal Tipping Points — Planetary Solvency Dashboardglobal-tipping-points.org]

1 · Climate   now: high trend: critical

• 2025: Already at the ‘severe’ level: the number of events causing losses of >$1 billion and episodes causing 10,000 or more deaths is rising; emissions continue to increase.
• 2050: Beyond 1.5 °C, tipping points increase risk exponentially. Current emissions indicate warming of >2 °C by 2050—the ‘catastrophic’ level is very likely (≥90%), while ‘extreme’ is possible (40–60%).

2 · Nature   now: high trend: critical

• 2025: From ‘limited’ to ‘severe’: several planetary boundaries have been breached, the extinction rate is high, and stress on water and food systems is increasing.
• 2050: Interconnected risks increase the threat of ecosystem collapse. ‘Catastrophic’ impacts are very likely (≥90%), while ‘extreme’ impacts are possible (40–60%).

3 · Society   now: moderate trend: high

• 2025: From ‘limited’ to ‘severe’, at times reaching ‘decimation’ in vulnerable states; numerous active conflicts and growing protectionism.
• 2050: Water, food and heat stress intensify migration and conflict. Impacts ranging from ‘severe’ to ‘decimation’ have a ‘possible’ to ‘likely’ probability (40–90%).

4 · Economy   now: low trend: high

• 2025: The impact remains ‘limited’ for now, although the scale of climate events and losses is rising towards 1% of GDP.
• 2050: Damage equal to 19% of GDP by 2050 (that is, a significant slowdown in growth). However, this figure excludes tipping points and many other risks. Given the high uncertainty and interconnected risk factors, a ‘decimation’ or ‘catastrophe’ level is possible (40–60% probability;>25% loss of GDP).

Insufficient measures

The current pathway, based on legislation already enacted, is leading the world towards warming of +3 °C — +3,8 °C [NGFS, Phase V, 2024]NGFSA group of central banks and supervisors, including the ECB and the Federal Reserve, established to help green the financial system — Climate Scenarios for central banks and supervisors, Phase V (2024)“Current Policies assumes that only currently implemented policies are preserved, leading to high physical risks”“Current Policies 3.0 °C”. This is a dual systemic failure: a lack of political will to mitigate warming by reducing GHG emissions, and a vast funding shortfall for adaptation—protection against climate risks already embedded in the system.

GHG emissions are rising, while finance flows into hydrocarbons

Despite political declarations, a structural energy transition is not yet under way. Data from the 2025 Lancet Countdown report reveal a paradox: amid record climate threats, the global community continues to invest in the factors causing those threats.

• Fossil fuels—the main cause of climate change—retain their share: In 2023, global energy-sector emissions rose by 1.6%, reaching a new all-time high. The share of fossil fuels in the energy mix barely moved: it fell from 82% in 2016 to just 81% in 2022, equivalent to the 1993 level [Lancet Countdown 2025Lancet Countdown 2025 Global Report“...global energy-related emissions grew by 1·6% during 2023, pushing associated CO2 emissions to a new all-time high... from 82% in 2016 ... to 81% in 2022 (equivalent to 1993 levels).”PDF · p. 25]. The decline in carbon intensity is completely offset by growth in total consumption.
• Money continues to flow into oil and gas: Lending to the fossil-fuel sector reached a 5-year high of $611 billion, exceeding ‘green’ lending by 15%. The strategies of the 100 largest oil and gas companies imply that production will exceed volumes compatible with the 1.5 °C target by 189% by 2040. Moreover, 17% of countries—15 states—spent more on net fossil-fuel subsidies than on health care [Lancet Countdown 2025Lancet Countdown 2025 Global Report“Fossil fuel lending reached a 5-year high of $611 billion ... exceeding green lending by 15%. ... put them on track to exceed their share of production consistent with 1·5°C of heating by 189% in 2040. ... 15 (17%) countries allocated more to net fossil fuel subsidies than to health.”PDF · pp. 32, 35, 36].
• Governments heavily subsidise hydrocarbons: In 2023, net fossil-fuel subsidies—subsidies granted minus revenue from carbon pricing—reached $956 billion. Governments subsidise fuel almost 10 times more than they earn from carbon taxes. Of the 87 countries analysed, covering 93% of global GHG emissions, the overwhelming majority—72 countries, or 83%—had a net negative carbon price [Lancet Countdown 2025Lancet Countdown 2025 Global Report“In 2023, countries issued $1063 billion in fossil fuel subsidies, nearly ten times the $107 billion raised from carbon price revenues, and generating a net fossil fuel subsidy of $956 billion... 72 (83%) of the 87 countries reviewed had a net-negative carbon price.”PDF · p. 35].
• Political engagement is declining: Attention to the issue is falling just as climate risks peak. In 2023, only 30% of countries mentioned health and climate in their statements during the UN General Debate, down from 62% in 2021. A similar retreat is visible in the corporate sector: the share of companies mentioning the effects of climate on health fell from 63% to 51% [Lancet Countdown 2025Lancet Countdown 2025 Global Report“only 30% of countries mentioning health and climate change in their UN General Debate statement, down from 62% in 2021... only 51% of companies referred to the health dimensions of climate change ... down from 63% in 2023.”PDF · pp. 40, 42].

Meanwhile, humanity is missing the enormous health benefits of decarbonisation: phasing out coal could prevent 1 million deaths every year [Lancet Countdown, 2025The 2025 report of the Lancet Countdown on health and climate change“1·00 million annual deaths were still attributable to coal combustion globally in 2022”PDF · p. 26].

Adaptation, by contrast, is critically underfunded

Adaptation is not optional but a condition for survival, yet global investment in it is grossly inadequate [Allianz, Research Climate Adaptation Report, 2025Allianz — Rethinking climate adaptation for global resilience (2025)“adaptation finance remains severely underfunded … Adaptation is no longer an option; it is a survival”].

Even wealthy countries can no longer adapt their own infrastructure fast enough: climate risks are growing faster than budgets, projects and governance systems.

In the UK, the official independent body established by law to assess climate policy and report to Parliament judged the country's preparedness for climate risks in 2025 to be inadequate: it found not a single area of adaptation delivery that could be rated ‘good’. [CCCClimate Change Committee — About“The Climate Change Committee (CCC) is an independent, statutory body established under the Climate Change Act 2008.”“...to report to Parliament on progress made in... preparing for and adapting to the impacts of climate change.”Official website; CCC, 2025Progress in adapting to climate change: 2025 report to Parliament“The UK’s preparations for climate change are inadequate.”“In terms of adaptation delivery, we do not find evidence to score a single outcome as ‘good’.”PDF · 2025 report to Parliament].

New York already faces growing risks from heat, coastal storms and extreme rainfall. About 2.5 million residents live in the 100-year floodplain. The FiDi-Seaport protection project alone is estimated to cost $5.5 billion in 2025 prices; if construction begins in 2029, its cost could rise to $8–9 billion. The city explicitly states that no single source of funding is sufficient for a project of this scale [NYC ComptrollerNYC Climate Dashboard — Resiliency“Today, nearly 2.5 million New Yorkers live in the 100-year floodplain.”Website; FiDi-Seaport Climate Resilience PlanImplementation — Project Cost“The estimated capital cost ... is $5.5 billion in 2025 dollars.”“...with escalation, the total project cost will be an estimated $8-9 billion.”“no single funding stream would be sufficient”Website · Implementation].

Developing countries: adaptation needs are many times greater than actual finance

Adaptation action ‘remains inadequate’, while the finance needed for it is ‘woefully inadequate’ [UNEP AGR, 2025UNEP — Adaptation Gap Report 2025 (2025)“Action on adaptation is still inadequate.”PDF · p. 4; UNEP AGR, 2025UNEP — Adaptation Gap Report 2025 (2025)“the financial resources needed to enable adaptation action in developing countries at the scale necessary to meet the growing challenges of current and future climate risks is woefully inadequate.”PDF · p. 10]. The gap between needs and actual finance is not narrowing [UNEP AGR, 2025UNEP — Adaptation Gap Report 2025: Running on empty (2025)“The adaptation finance gap is not reducing, and the Glasgow Climate Pact goal will be missed under current trajectories.”PDF · p. 7].

• Stated finance targets are not being met. The pledge by developed countries at the 2021 Glasgow summit to double adaptation assistance to developing countries by 2025—to about $40 billion a year—will not be met. The new 2035 climate-finance target (NCQG: at least $300 billion a year from developed to developing countries) is ‘clearly insufficient’ for adaptation: this sum is not adjusted for inflation and must fund both adaptation and emissions reduction, while adaptation alone will require $440–520 billion a year after adjusting for inflation [Glasgow · AGR 2025UNEP — Adaptation Gap Report 2025 (2025)“the Glasgow Climate Pact goal of doubling international public adaptation finance from 2019 levels to around US$40 billion by 2025 will be missed if current trends continue.”PDF · p. 7; NCQG · AGR 2025UNEP — Adaptation Gap Report 2025 (2025)“However, this new goal is clearly insufficient to meet adaptation finance needs in 2035 for two reasons.”“First, the NCQG is not adjusted for inflation, and therefore represents US$300 billion in the year 2035.”“would increase these needs to US$440−520 billion annually by the year 2035.”PDF · p. 8].
• Debt trap. In 2022–2023, 58% of international adaptation finance took the form of loans rather than grants. Climate disasters increase debt burdens and deprive countries of the capacity to invest in protection—the report calls this an ‘adaptation investment trap’ [UNEP AGR, 2025UNEP — Adaptation Gap Report 2025 (2025)“it is worrisome that debt instruments continue to dominate these overall flows, comprising 58 per cent on average in 2022–2023.”“‘adaptation investment trap’ where the rising climate disasters increase indebtedness and make it harder for countries to invest in adaptation”PDF · p. 8].
• The effectiveness of measures has yet to be demonstrated. Almost three quarters of what countries report about their action concerns ‘process’—risk assessments, training and plans; information on actual outcomes accounts for only 16%, and information on their impact on resilience just 12%, meaning that ‘the effectiveness and adequacy of adaptation measures cannot yet be assessed’ [UNEP AGR, 2025UNEP — Adaptation Gap Report 2025 (2025)“Nearly three quarters of the information on results of actions refers to direct outputs, such as risk assessments, trainings or establishment of climate information systems.”“Information on outcomes (16 per cent) … and on impacts (12 per cent) … is still not widespread.”PDF · p. 6; UNEP AGR, 2025UNEP — Adaptation Gap Report 2025 (2025)“not enough can be said about the effectiveness and adequacy of adaptation actions.”PDF · p. 10].
• High returns. Every $1 invested in coastal protection prevents $14 in damage [UNEP AGR, 2025UNEP — Adaptation Gap Report 2025 (2025)“every US$1 spent on coastal protection avoids US$14 in damages”PDF · p. 4].
• The role of private capital is limited. The realistic potential of the private sector is 15–20% of the requirement (about $50 billion a year); current private flows are only ~$5 billion a year [UNEP AGR, 2025UNEP — Adaptation Gap Report 2025 (2025)“the private sector could deliver approximately 15−20 per cent of total national adaptation funding needs (US$50 billion/year of the US$310−365 billion/year by 2035).”“as current private sector flows are low, with tracked levels at ca US$5 billion per year”PDF · p. 9]. Large-scale underfunded demand creates an opportunity for private capital, but requires public co-financing and lower debt risks.

Additional barriers to adaptation

Beyond the financing gap, the implementation of adaptation measures faces a number of systemic constraints:

• Lack of time and slow institutional cycles: Many government strategies are designed around 2050 and 2100 horizons, yet the pace of climate change regularly exceeds conservative projections. Meanwhile, designing, financing and building major protective infrastructure takes years or decades. Today's institutional cycles are too slow to respond in time.
• Ignoring tail risks: Most baseline models and strategies, including Net Zero scenarios, focus on the most likely outcomes and exclude cascading or tail risks (see ‘Actuarial assessment’). Planning therefore makes no allowance for extreme deviations for which the global economy may be unprepared.
• Global competition for resources: A mass shift towards adaptation could begin all at once—for example, after a major climate catastrophe that fundamentally changes society's assessment of risk. A sharp global surge in demand for adaptation projects could intensify competition for finance, construction capacity, materials and specialist expertise.

Key causes of ineffectiveness

• Short-term thinking: Political and financial systems are geared towards short electoral cycles and quarterly reporting, while climate risks are wrongly perceived as a problem for the distant future (2050–2100).
• Discounting the future: Under current economic models, future losses are discounted. In the short term, cheap fossil fuels deliver greater financial and political benefits than a capital-intensive energy transition and preventive adaptation.
• Lack of enforcement mechanisms: The global nature of the problem requires collective action, yet there are no effective institutional mechanisms at international level for monitoring and strictly enforcing climate commitments.
• Underestimation of risks: The full picture of the problem—its interconnections, systemic nature and the severity of its irreversible consequences—remains poorly understood.

Historically, social mobilisation on this scale occurs in response to an obvious and immediate threat to survival. Yet the nature of climate change means that the level of danger and the scale of the threat will probably be felt and widely recognised much later.

07.3 Mispricing the largest asset class

Failure to price climate risks correctly

The models the market relies on systematically understate climate risk, so key assets may be mispriced:

• Failure to price climate risks correctly in government bonds is leading to ‘the mispricing of the world’s largest asset class’ — sovereign debt worth $65 trillion.[Oxford, 2024Oxford — Impact of physical climate risks on sovereign credit ratings (2024)“mispricing the risk of world’s largest asset class … global sovereign bond market is valued at nearly $65 trillion”].
• Climate risk may have a material impact on the impairment of non-financial assets [PwC, 2024PwC — Impact of climate change on financial statements (2024)“significant impact on impairment of non-financial assets … trigger the need for an impairment test”].
• Markets do not fully price in long-term climate risks [BIS, Climate-aware investing, 2025].
• “A large-scale shift in beliefs or awareness about the economic and financial implications of these risks could cause a significant and abrupt repricing of climate-exposed assets.” “This may result in a sudden re-evaluation of the materiality of climate-related financial risks by market participants.” [FSB, 2025Financial Stability Board (2025)“A large-scale shift in beliefs or awareness about the economic and financial implications of these risks could cause a significant and abrupt repricing of climate-exposed assets.”“This may result in a sudden re-evaluation of the materiality of climate-related financial risks by market participants.”PDF].
• The sovereign bond market does not yet fully price in chronic physical climate risks, while acute weather disasters are already driving up yields for highly indebted countries. This creates a risk of broader asset repricing as climate-related losses materialise [BIS, 2025BIS — Climate-related risks in sovereign bond pricing (2025)“temperature changes are not related to sovereign borrowing costs because they are a chronic physical climate risk that is not yet fully priced in by investors.”“chronic physical risk has not been fully priced in sovereign bond yields.”“countries with high levels of debt tend to record higher sovereign yields as acute physical risk increases.”PDF].
• Global macroeconomic models used by banks and regulators worldwide omit many second-order effects and cascading risks [NBER, 2026NBER (revised) — The Macroeconomic Impact of Climate Change: Global vs. Local Temperature (2026)“aggregate climate damages should not be considered comprehensive … existing estimates not account for the full impact”; PIK, 2025PIK — The economic commitment of climate change, revised (2025)“tipping points... are not considered”; NGFS, 2024NGFS — High-level overview of NGFS Scenarios, Phase V (2024)“tipping points... polycrises”].
• Integrated assessment models (IAMs) used for forecasting ‘significantly underestimate risk’ because they exclude the most severe yet plausible scenarios and non-linear points of no return [IFoA, 2025IFoA — Planetary Solvency: Finding our Balance with Nature (2025)“risks have been hugely underestimated … exclude many of the most severe risks (tipping points, extreme events, migration, sea level rise)”].
• Banks still lack widely accepted models that fully incorporate physical climate risk into credit risk. As such approaches are adopted, the risk profiles of assets in vulnerable regions may be reassessed, potentially leading to tighter lending conditions, a higher cost of capital and the repricing of collateral [BIS, 2025BIS — Incorporating climate physical risks into banks’ credit risk models (2025)“a major obstacle for banks is the absence of generally accepted industry models of credit risk adjusted for physical risk factors.”“Such models are increasingly needed to account for physical risks in banks' capital requirements, loan loss provisions, pricing of loans…”“databases on the type of the borrower’s assets, their geolocation, exposure to climate factors…”PDF].
• The difficulty of accurately forecasting future physical damage continues to hinder the full integration of climate risks into baseline scenarios [Fitch Ratings, 2025Fitch — Sovereign Climate Vulnerability Signals / SCVS (2025)“material uncertainties in the evolution of climate risk … SRM will not necessarily fully capture climate risks”].
• Natural disasters redirect trillions of dollars in global spending away from the economy at large and towards repairing damage from the latest fire, flood and storm, as well as preparing for the next ones [Bloomberg, The Climate Economy Outlook, 2025Bloomberg — The Climate Economy 2025 Outlook“redistributing trillions of dollars in global spending … repairing the damage from the last fire, flood and storm”].

09.1 Introduction · geography of risk

Two divides: latitudinal and wealth-based

Climate risks and impacts are distributed extremely unevenly around the world, and each region requires its own detailed analysis. The broad pattern comes down to two divides.

1. The latitudinal divide. The south suffers primarily from heat and drought, while the north faces extreme rainfall and flooding. The difference is apparent even within a single country or bloc — the US, Europe or Ukraine: economic losses and physical risks in southern and northern areas may differ severalfold.
2. The wealth-based divide. Poor countries and regions are the most vulnerable: they lack the resources for recovery, adaptation and the energy transition. Southern countries, where it is already hot, reach levels of heat that are unacceptable for human life and economic activity sooner.

At the same time, regions are linked by a shared atmospheric system: for example, the disruption of the stratospheric polar vortex over the Arctic intensified extreme rainfall in southern China [Arctic stratospheric polar vortex collapse amplified South China extreme rainfall, 2025]. There are no completely isolated, ‘safe’ countries — climate change affects every country to some extent.

09.1 Introduction · geography of risk

Europe: shifting economic activity and the ‘Two Europes’

Europe is unprepared for rapidly accelerating climate risks, several of which have already reached critical levels. Policy action is lagging far behind the pace at which the threats are growing [EEA, EUCRA, 2024].

The greatest economic damage comes not from one-off disasters but from persistent, chronic impacts of climate change: recurring heatwaves, lost working hours and rising energy costs for cooling buildings and critical infrastructure such as data centres [JRC]. For example, in 2022 the temperature in the UK exceeded 40°C for the first time on record: railway tracks buckled and runways melted [JRC PESETA V, 2025JRC — Regional economic climate risks in Europe (2025)], because much of Europe's infrastructure was designed for the former climate, and every climate record subjects it to stresses it was not built to withstand.

A climate-driven shift in economic activity is under way: tourism is moving north, while agriculture in the south, on which the rest of Europe partly depends, faces an existential threat. This is creating both clear losers and potential, less obvious winners.

Climate change amplifies economic inequality. The greatest damage will fall on already more vulnerable coastal, Mediterranean and Eastern European regions [JRC]. Poorer regions with ageing populations and a dependence on ‘dirty’ industries may face a ‘perfect storm’ in which physical shocks trigger severe social and economic crises, increasing credit and sovereign risks.

1. Potential ‘Winners’ — resilient, developed regions (southern Germany, Scandinavia and Austria). They attract investment and skilled professionals for the ‘green transition’; their economies are sufficiently diversified to withstand a shock, and their financial capacity allows them to invest in adaptation. They could become ‘climate havens’ if they invest in adaptation and the energy transition.
2. Potential ‘Losers’ — vulnerable, lagging regions: Southern Europe (water stress) and Eastern Europe (‘carbon traps’, public-health problems). A double burden: the highest costs of moving away from fossil fuels and the most severe physical impacts. The key risk is a vicious circle: these regions need enormous investment for the transition and adaptation, but rising climate and social risks make them less attractive to capital.

Regional matrix

09.2.1 Case study: Cyprus

Note: There are still no comprehensive models capable of accounting for all cross-system and cascading effects (spillover effects). The reality may therefore be more severe: climate processes may unfold faster, reach higher levels of intensity and be accompanied by phenomena not previously accounted for.

Epicentre of warming

The Mediterranean region, like Europe as a whole, is warming at 2× the global average rate [Cyprus NASCyprus National Adaptation Strategy“EMME is warming nearly twice as fast as the global average especially during summer, while alterations in the hydrological cycle, primarily through reduced precipitation, have become increasingly evident.”PDF · p. 26]. Major climate risks, including wildfires, floods, water scarcity and coastal erosion, are already damaging Cyprus's biodiversity, agriculture, aquaculture and fisheries, underscoring the urgent need for stronger prevention measures [European CommissionEuropean Commission — Country Report: Cyprus“Significant climate risks (e.g. wildfires, floods, water scarcity and coastal erosion) are harming Cyprus’s biodiversity, agriculture, aquaculture and fisheries sector, thus underscoring the urgent need for improved prevention.”Website].

Already happening

Increase in tropical nights (Tmin > 20°C)

Night-time heat hinders physical recovery, increasing health risks for residents and tourists.

Uneven regional warming

Rising temperatures have affected the island unevenly. In Nicosia (centre), Larnaca (south) and Polis Chrysochous (north), a sharp increase in the number of hot days (>35 °C) has been recorded relative to the 1986–2005 baseline. In mountainous Agros the increase is also significant, though less pronounced. By contrast, in Paphos (west) and mountainous Prodromos only a slight increase has been recorded.

Wildfires

Cyprus faces a significant and steadily rising wildfire risk. The island has the highest level of fire danger among all Mediterranean islands and ranks second in Europe for burnt area as a share of its territory. The probability of weather conditions that could cause fires threatening life and property is estimated at more than 50% in any given year [World Bank, 2024World Bank Group: Country Climate and Development Report for Cyprus (2024)“Cyprus faces a significant and increasing risk of wildfires... Cyprus faces the highest wildfire danger among Mediterranean islands and ranks second in Europe for burned area per land mass... The likelihood of weather conditions leading to wildfires that can cause loss of life and property is estimated to be greater than 50 percent in any given year.”Link].

Climate change has already made extreme fire weather conditions (FWI) in Cyprus 10× as likely [State of Wildfires 2024-25State of Wildfires 2024-25“FWI values recorded in Türkiye, Cyprus and Greece were 10 times more likely due to climate change. The FWI values recorded in Spain and Portugal were 40 times more likely...”PDF · p. 41].

In 2025, Cyprus experienced the worst fire season in its history. It was marked by extreme conditions, including a severe heatwave and dry weather. As a result, an area almost the size of Nicosia [2026 Country Report2026 Country Report - Cyprus“The 2025 wildfire season in Cyprus was marked by extreme conditions (including a severe heatwave and dry weather) that resulted in the worst wildfire in Cyprus’s history, burning an area almost as large as Nicosia.”PDF · 2026]was burnt. Around 900 private propertieswere destroyed, and total direct damage is estimated at €252.68 million [European CommissionEuropean Commission — Mobilisation of the European Union Solidarity Fund, COM(2026) 1002 final“The Cypriot authorities estimate the total direct damage caused by the disaster at EUR 253.69 million. The Commission accepted EUR 252.68 million as plausible total direct damage.”“Several schools and health establishments had to reduce their services and close to 900 private properties were destroyed.”PDF · 18 May 2026].

The events of 2025 continue a trend of escalating risk:

Freshwater crisis

Cyprus already faces acute, chronic water scarcity, and its water exploitation index is the highest in the EU [Country ReportEuropean Commission — Country Report: Cyprus“Cyprus faces severe, chronic water scarcity and its water exploitation index indicates the highest pressure in the EU as a whole.”PDF]. Meanwhile, droughts and water scarcity will only worsen, placing extreme pressure on the population and infrastructure [EPRS, 2025European Parliamentary Research Service (Feb 2025)“Water scarcity and drought in particular are expected to worsen, putting further pressure on human life and ecosystems... lack of sustainable water management to build resilient agriculture is of particular concern.”PDF · pp. 2, 4]. The rapid physical depletion of natural water resources is therefore a key risk.

• Shortfall in natural water resources: in 2010, 2013–2017 and 2020–2022, natural water resources were insufficient to meet demand. In 2013, 2014 and 2017, demand was not fully met even after accounting for all desalinated and recycled water produced [Audit Office, 2024Audit Office of the Republic of Cyprus — Climate Change Adaptation (2024)"During the years 2010, 2013–17, 2020–22, an insufficiency of natural water resources to meet demand was recorded... During the years 2013, 2014, and 2017, water demand was not fully met even with the use of the produced desalinated and recycled water."PDF · p. 5].
• Aquifer depletion and salinisation: over-abstraction has been recorded in 14 of 22 groundwater bodies. In 7 of 22 aquifers, salinisation has occurred due to seawater intrusion, which is also driven by another climate risk — sea-level rise [Audit Office, 2024Audit Office of the Republic of Cyprus — Climate Change Adaptation (2024)"Depletion & Salinization of Aquifers: Over-extraction in 14 out of 22 Groundwater Bodies... Salinisation (seawater intrusion) in seven out of 22 GB."PDF · p. 5].
• Falling groundwater levels: the downward trend continues because of declining precipitation and increasing evaporation. Natural aquifer recharge is also falling as effective precipitation changes and the recharge period shortens [Audit Office, 2024Audit Office of the Republic of Cyprus — Climate Change Adaptation (2024)"Continuation of the declining trend in groundwater levels due to reduced rainfall and increased evaporation. Reduction in groundwater recharge due to changes in the effective precipitation and the duration of the recharge period."PDF · p. 6].

In 2026, reservoir levels reached their lowest point in the 125-year observational record even before the tourist season began [Copernicus, 2026EU Space: Copernicus Image of the Day“Severe drought in Cyprus, February 2026”Website]. The authorities urged the public to cut water consumption by 10%, while the 2026 allocation of water for agricultural irrigation was reduced by one-third [Euronews, 2026Euronews“Cyprus water emergency: citizens urged to reduce water use as dams reach record low” (Jan 2026).Website].

Near-total dependence on desalination:

The country has shifted almost entirely to desalination: around 80% of all drinking water on the island — up to 245 thousand cubic metres per day — is supplied by energy-intensive desalination plants [WDD CyprusWater Development Department (Ministry of Agriculture, Cyprus)Official data: Permanent and mobile desalination plants now cover approx. 80% of the island's drinking water needs.]. Desalination is critically dependent on electricity, creating a potential cascading risk.

Energy

Future

Climate

Cyprus will face significant temperature increases and declining precipitation in both the near and distant future. [Cyprus NASCyprus National Adaptation Strategy“Cyprus is projected to experience significant increases in temperature and decreases in precipitation in both the near (2041-2060) and distant (2081-2100) future.”PDF · p. 26]

• Cyprus's official adaptation strategy sets out two scenarios: RCP4.5 and RCP8.5, but the current climate change pathway lies between them, so the actual risks will probably be higher than under RCP4.5 but lower than under RCP8.5.
• These figures show average values for the selected periods. Individual years may deviate in either direction, including peaks substantially above these values.
• The projections show Cyprus-wide average values. Inland areas and cities, particularly Nicosia, are significantly hotter than coastal and mountainous areas: in 2023–2025, Nicosia already averaged about 29 days >40 °C per year — 24 days in 2023, 36 days in 2024 and 26 days in 2025 [Cyprus Department of MeteorologyCyprus Department of Meteorology — Monthly Weather ReportsCalculated from monthly reports for Nicosia / Athalassa: 2023 — 24 days; 2024 — 36 days; 2025 — 26 days with a maximum daily temperature above 40 °C.Website · Monthly Weather Reports 2023–2025].
• All indicators show changes relative to the baseline period 1986–2005: in other words, values such as ‘+29 days’, ‘−48%’ or «x6» indicate an increase or decrease relative to Cyprus's observed climate in 1986–2005.

Timing: mid-century under older projections; according to new data, the risk could materialise in just 10–12 years:

Optimistic scenario (RCP4.5, +1.6 °C).

Pessimistic scenario (RCP8.5, +2.1 °C)

Timing: end of the century under older projections; according to new data, the risk could materialise in just 25–35 years:

Optimistic scenario (RCP4.5, +2.1 °C).

Pessimistic scenario (RCP8.5, +4.1 °C)

Food

Cyprus has no strong domestic food buffer: agriculture is already constrained by water scarcity and heat, while food imports depend on external suppliers, including Greece and Italy [2026 Country ReportEuropean Commission — 2026 Country Report: Cyprus“The agricultural sector is challenged by water scarcity and heat stress, which are impacting crop yields and food security.”PDF · p. 81; WITSWorld Bank WITS — Cyprus Food Products Imports by country, 2023“In 2023, the top partner countries from which Cyprus Imports Food Products include Greece, Italy, Germany, United Kingdom and Argentina.”Website · 2023].

Imports do not eliminate the risk: Cyprus's key food suppliers include Greece and Italy, which are in the same climate-vulnerable Mediterranean region [WITSWorld Bank WITS — Cyprus Food Products Imports by country, 2023“In 2023, the top partner countries from which Cyprus Imports Food Products include Greece, Italy, Germany, United Kingdom and Argentina.”Website · 2023; JRCJoint Research Centre — Climate impacts on the Water-Energy-Food-Ecosystem nexus in Europe“The Mediterranean region faces significant challenges in meeting irrigation demands in current climate (1981-2010), leading to increasing water scarcity and stress.”PDF · 2026]. Climate change is expected to reduce crop yields in other regions as well; there is also a risk of global food shocks. (See the Food chapter).

Local production losses are substantial: Cyprus is among the EU areas experiencing the largest relative declines in wheat yields due to drought, alongside Spain, Romania and southern Italy. Heat and water scarcity are already reducing crop yields, raising costs and threatening food security [European Commission, 2026Cyprus 2026 Country Report (SWD(2026) 213)“Heat and water stress are already reducing yields, increasing costs, and threatening food security...”PDF] [EEA, 2025Europe’s environment and climate: state and outlook 2025“Significant reductions in yields of wheat due to droughts are projected at 2°C of warming, with the highest reductions in percentage terms expected in Spain, Romania, southern Italy and Cyprus.”PDF · p. 37].

This double physical shortage — locally and among suppliers — could therefore translate into significant inflation. As a result, Cyprus is expected to see one of the EU's largest increases in household food expenditure, and — alongside Greece — the largest increase in healthcare expenditure due to climate change [EPRS, 2025European Parliamentary Research Service (Feb 2025)“A study on the cost of climate change... estimates that the highest increase in climate-induced health expenditure is expected to occur in Cyprus, as well as in Greece. Cyprus is also among the countries with the highest increase expected in household food expenditure.”PDF · p. 6].

Sea-level rise and tourism

Tourism is a vital pillar of Cyprus's economy: around 20% of GDP is linked to the sector directly or indirectly [Trade.govU.S. International Trade Administration“Travel and tourism-related activities generate approximately 20 percent of ROC GDP” (2026).Website]. Yet the sector depends critically on coastal ecosystems, which are now degrading rapidly. More than 90% of tourists choose coastal towns, while pronounced seasonal peaks significantly intensify water stress and overload infrastructure [2026 Country ReportEuropean Commission — 2026 Country Report: Cyprus“Coastal tourism is highly seasonal, leading to environmental degradation, water stress, and infrastructure overload during peak months...”PDF · p. 109].

In addition to extreme heat and freshwater scarcity, sea-level rise and the associated coastal erosion pose a physical threat to tourism in Cyprus. Coastal infrastructure in Cyprus is not yet subject to systematic climate assessment, even though sea-level rise is projected to cause annual losses of up to 0.4% of GDP by 2050; timely adaptation could reduce these losses by 90% [EEAEuropean Environment Agency“The rising sea levels are projected to cause annual economic losses of up to 0.4% of gross domestic product by 2050. Strategic adaptation measures... could reduce these losses by up to 90%.”Website].

Economy

European Commission estimates: Cyprus ranks first in the EU for climate risk

Under the +2 °C scenario, Cyprus ranks first for economic damage among all 27 EU member states [JRC PESETA V, 2025JRC — Regional economic climate risks in Europe (2025)“A significant proportion of the population (more than 75%) in countries such as Greece, Cyprus, and Croatia are expected to suffer significant losses both of GDP and consumption.”“Countries are ordered by their average losses in the baseline.” (Figure 4, CY is far left)PDF · p. 13]. A report by the JRCEuropean Commission's Joint Research Centre divides the damage into two indicators: GDP decline (overall economic activity) and decline in consumption (a real fall in living standards and welfare, because unavoidable spending, such as repairing infrastructure after disasters, increases GDP but directly reduces household incomes). The charts show the following levels of risk to the population:

Estimates by Cypriot research centres

Cumulative discounted losses to the island's economy by 2050, based on a scenario in which +2 °C is reached by 2050 (this threshold and the associated damage may arrive considerably earlier):

Impact on the population: household spending on food, healthcare and electricity is projected to rise sharply. Cyprus is expected to become one of the EU countries where vulnerable groups are hit hardest [Cyprus Institute, 2025The Cyprus Institute — Policy Brief (2025)“Cyprus is expected to be one of the countries with the strongest negative impacts on vulnerable households due to climate change. Household expenditure on food, electricity and health services are projected to increase...”PDF · p. 8].

Physical risk

In addition to macroeconomic risks, investors face a direct physical threat to assets:

• Wildfire paradox: the island's wildfire risk is rising steadily, while Cyprus consistently ranks among the countries with the lowest wildfire-prevention budgets. [JRC, 2025JRC — Regional economic climate risks in Europe (2025)“Cyprus... has low investment levels for fire prevention, despite experiencing high risks as indicated by significant GDP losses.”PDF · p. 22]. For example, all Cypriot airports in the TEN-T network are vulnerable to wildfires [European Commission, 2026Cyprus 2026 Country Report (SWD(2026) 213)“all Cypriot TEN-T airports are vulnerable to wildfires.”PDF].
• Insurance gap: there is virtually no financial protection against climate risks: the insurance gap is estimated at 98%, with only 2% insured. If a risk materialises, climate losses will fall directly on asset owners and the state budget [European Commission, 2026Cyprus 2026 Country Report (SWD(2026) 213)“Cyprus’s climate insurance protection gap, estimated at 98%, highlights potential fiscal risks (see EEA data)... particularly for wildfires.”PDF · p. 5].
• Moving away from the ‘sea–sun–sand’ tourism model: an official adaptation measure (priority: High) is to reshape the industry by shifting away from beach holidays towards resilient, less weather-dependent forms of tourism [Cyprus Action PlanNational Climate Change Adaptation Action Plan 2025–2050 (Measure TOUR 2n)“Reformulate the current tourism model, seeking models that are sustainable, moving away from the dominating ‘sea, sun, sand’ model...”PDF · p. 252 (print)].

Adaptation: can the negative scenario be avoided?

Successfully withstanding climate shocks requires a large-scale transformation of infrastructure (for more detail, see the global ‘Adaptation’ section). In Cyprus, as in many other countries, this process is lagging far behind the pace of warming, partly because of insufficient funding and delays in policy implementation:

• Chronic delays across the full range of measures: European Commission reports are replete with terms such as ‘delayed’ (delayed), ‘insufficient’ (insufficient) and ‘low progress’ (low progress) across most areas of climate adaptation in Cyprus. The introduction of a carbon tax, development of transport infrastructure, modernisation of drainage systems and transition to a circular economy are moving too slowly. Despite direct recommendations in 2025 to modernise the power grids, new renewable-energy projects again face serious barriers to connection, while the LNG import project is being delayed [EC Country Report, 2026EU Commission Country Report: Cyprus (2026)“Low progress has been observed... investments remain insufficient... adoption of a carbon tax has been delayed... transition to the circular economy is continuing slowly... major delays in the connection of new renewables plants to the grid.”]. A revised adaptation strategy through 2050 was prepared in early 2025, but ministerial approval and implementation are still delayed [EU Commission, 2026EU Commission Country Report: Cyprus (2026)“The revised national adaptation strategy (NAS) 2025-2050 was finalised in February 2025, but its ministerial adoption is still pending, and this is delaying its implementation.”PDF · p. 15].
• Adaptation targets arriving too late: Cyprus's adaptation strategy — again, like those of many other countries — is geared towards 2050. Yet the previous scientific consensus expected critical climate thresholds to be reached in 2041–2060, while new data create a risk that they will be crossed as early as 2036–2038. Even if the plan is implemented without delay, its measures may simply come too late.
• Investment shortfall: The European Commission estimates that by 2050 Cyprus will need €3.4 billion for adaptation measures, yet current plans cover less than 30% of this amount. Climate resilience is not being systematically integrated across economic sectors [EU Commission, Country ReportEU Commission Country Report: Cyprus“Challenges nevertheless persist, including a need to invest EUR 3.4 billion in climate adaptation measures by 2050 (less than 30% of this has been allocated so far), and a lack of systematic climate-proofing across sectors.”Website].
• Infrastructure paralysis: Practical implementation of coastal protection, power-grid resilience and health-threat monitoring measures has still not begun at the necessary scale. Progress on water-supply and wastewater-treatment infrastructure is also extremely limited [Cyprus Institute, 2025The Cyprus Institute: Policy Brief“protecting coastal infrastructure ..., enhancing ... electricity grid ..., and mechanisms to monitor public health problems ... have not yet started to be adequately implemented. Low progress has been observed in acting on the CSR that called for investment in water and wastewater infrastructure.”].

10.1 Vulnerability matrix

Industry vulnerability matrix

Each industry requires a separate assessment that takes account of where it operates and of global interconnections, but economies rest on ecosystem services — food, water, energy and raw materials — as well as on regulatory frameworks. The climate crisis hits each of these foundations and then transmits the damage to the financial system through lower profits, damaged collateral, higher credit risk and insurance payouts [IFoA, 2024IFoA — Climate Scorpion (2024)“nature as an asset that provides ecosystem services to society, such as the provision of raw materials for our economy, the provision of food and regulating services like climate regulation.”“ecosystem services… provide the essentials that society requires in terms of food, water, a stable climate, and so on.”; IFoA, 2023IFoA — Biodiversity and Nature-related Risks for Actuaries (2023)“ecosystem services… underpin our economies, societies, health and food systems”“Provisioning services are goods obtained from ecosystems such as food, raw materials, freshwater, energy and medicines.”; Zeidy, 2023Zeidy — Climate Related Risks to the Financial Sector (2023)“climate change can damage physical collateral”“severe weather events… reduce corporate profitability and potentially increase credit risk to lenders”“Severe climate change will lead to increased insurance claims and liabilities.”].

Dual, cumulative risk

Decarbonisation is highly uneven: emissions from power generation (Power) are falling sharply and transport emissions are stabilising, while emissions from heavy industry (steel, cement and chemicals) and agriculture/land use continue to rise or remain high [Rhodium, Climate Outlook, 2025]. This creates a dual risk for industry and agriculture:

1. Greatest transition risk: because these are the industries that are not decarbonising, they will become the main target of future climate regulation (carbon taxes and standards) — a direct threat to profitability.
2. Greatest physical risk: it is the water-intensive industrial and agricultural sectors that suffer most from drought, water shortages and heat.

Unlike energy and transport, agriculture has no clear technological solutions: decarbonising it may be the hardest challenge. Companies in renewable energy and electric-vehicle manufacturing are ‘on the right side of history’; heavy industry and agriculture are the primary source of future risk. The financial sector is already quantifying this: ‘dry’ events (drought and heat) cause the greatest productivity losses and the largest increases in default probabilities in agriculture and capital-intensive industries, while the energy supply sector suffers considerably from both ‘dry’ and ‘wet’ events [NGFS, Short-Term Scenarios, 2025].

10.2 Beneficiaries

Likely beneficiaries: on the right side of repricing

The energy transition is the greatest opportunity for industrial growth since the Industrial Revolution [Boston Consulting Group, 2024]. It is a megatrend that will shape the economic landscape over the coming decades, whatever the short-term effects [S&P Global, 2025S&P Global — Credit FAQ: How the Global Climate Policy Pendulum Could Affect Our Ratings (2025)“climate transition is a megatrend … shape the economic landscape over the coming decades”]. Trillions of dollars are already being reallocated from sectors hurt by climate change to sectors that profit from it: the market rewards resilient business models and punishes vulnerable ones [Bloomberg, The Climate Economy Outlook, 2025].

The Bloomberg ‘Prepare & Repair’ Index (BPRAET) brings together companies that benefit in two areas: ‘preparedness’ (adaptation — building products, risk management, consulting and storage) and ‘disaster recovery’ (HVAC, grid equipment, environmental services, insurance, engineering and emergency response). The ‘recovery economy’ has systematically outperformed the broad market over 3-, 5- and 10-year horizons [Bloomberg, 2025].

Context · water as infrastructureWater is an underappreciated driver of EU growth: water infrastructure faces an investment gap of hundreds of billions of euros, while inaction is already costing tens of billions a year. Key ‘industries of the future’ — semiconductors, data centres, ‘green’ hydrogen and batteries — are extremely water-intensive, and cannot grow unless water scarcity is addressed [WSP, Socio-economic study on the value of the EU investing in water].