Climate Risk Is Not About Politics, It's About Economics

Forbes

30-04-2025

(Photo by Ashley Cooper/Corbis via Getty Images)
Conversations about climate change are often drowned in politics or pitched as social responsibility. But in boardrooms and markets, the idea that climate risk is abstract or optional is quickly unravelling. It's already hitting earnings, bonds, and balance sheets, through damaged infrastructure, supply shocks, and soaring insurance costs.
"This is not a 2100 conversation anymore,' said Tom Sabbatelli-Goodyer, Vice President of Climate Risk at FIS in an interview. 'It's happening now—and the question is how bad it's going to get."
In 2024, global average temperatures breached the 1.5°C threshold for the first time—a milestone once seen as a line not to cross. Even if temperatures dip slightly below that level in coming years, the trajectory is clear, and so are the consequences.
Extreme weather is not just an environmental issue—it's an economic one. Their ripple effects on trade, agriculture, and supply chains are driving up prices and destabilizing markets. Take the Panama Canal, where drought reduced traffic by 35%, affecting 5% of global trade. In Europe, droughts along the Rhine River impeded shipping and raised transport costs, while heatwaves in Southern Europe slashed crop yields—most notably olive oil in Spain—fueling inflation across the EU.
These aren't hypotheticals, they're inflationary shocks that are directly impacting businesses and households. In an already volatile political and economic climate, climate-driven inflation exacerbates instability. With trust in institutions declining and living costs rising, the risk of social unrest and populist backlash increases—adding further complexity to monetary and fiscal policy.
Governments, constrained by budgets, are less able to absorb shocks. Meanwhile, central banks are stuck navigating between fighting inflation and avoiding recession. In this context, climate change doesn't just affect the environment—it undermines global financial stability.
From 1980 through early 2025, the U.S. alone faced over 400 weather-related disasters exceeding $1 billion in damage each, totaling more than $2.9 trillion in losses, according to the National Centers for Environmental Information (NOAA). The pace is accelerating: while the 1980s saw an average of nine such events annually, that number jumped to 23 per year from 2020–2024.
Estimates suggest that climate change could cost the global economy $3-6 trillion or 2-3% of global GDP, with impacts in every country, exceeding 20% of GDP in some. Yet we are already significantly off track for the 1.5°C goal under the Paris Agreement and Morgan Stanley analysts are already projecting a 3°C world—a future that feels less theoretical as today's soaring insurance costs already reflect the rising toll of extreme weather.
In 2024 alone, the U.S. experienced 27 billion-dollar climate disasters, including hurricanes, wildfires, and severe storms—making it the fourth-costliest year on record. Even if the U.S. government chooses to defund climate research or roll back policy, that won't change the actuarial tables. "Insurance companies still need to price risk," says Sabbatelli-Goodyer. 'And they're not going to ignore what it means for their bottom line.'
The insurance industry is already retreating from high-risk areas like Florida and California. 'There are already places where insurers have pulled out,' Sabbatelli-Goodyer warns. 'If companies don't understand that exposure, they're in for a shock.'
In April 2025, the Trump administration reignited its push to slash funding to the NOAA, a leader in global climate science. Such cuts could undermine the nation's ability to monitor and prepare for climate threats. But ignoring risk doesn't make it go away. It only increases our vulnerability.
The International Monetary Fund echoed this warning in its latest World Economic Outlook, noting that global supply chains magnify disruptions and create 'large multiplier effects.' Climate shocks—wildfires, floods, droughts—act as accelerants in an already fragile system.
Average climate-related losses are projected to double over the next 25 years, with half of that increase tied to the growing value of exposed assets. According to Swiss Re, insured losses alone could double within the next decade.
As these inflationary pressures mount, understanding the nature of climate risk becomes critical—not just for policymakers, but for businesses, investors, and insurers navigating an increasingly uncertain world. Climate risk breaks down into two major categories: physical risks and transition risks.
Physical risks encompass both acute shocks—like storms, floods, and wildfires—and longer-term stresses such as sea-level rise or chronic heat. Transition risks, on the other hand, stem from the policy and economic shifts required to move toward a low-carbon future. While essential for long-term resilience, these shifts—like carbon pricing or stricter environmental regulations—can drive up short-term costs, particularly in energy and industrial sectors. Understanding both sides of the climate risk equation is now essential to financial and strategic planning.
Even as the ESG backlash grows in the U.S. and the EU delays aspects of its Corporate Sustainability Reporting Directive (CSRD), the financial implications of climate risk remain unchanged.
The IPR Quarterly Forecast Tracker for Q4 2024 and Q1 2025 has just been released, reporting a clear acceleration in global climate policy, with 232 developments recorded—25 of which could significantly influence the pace of climate action. Progress in areas like deforestation in Brazil and increased policy activity in energy and land use signal growing momentum, despite ongoing political uncertainties.
While the politics may change, the physics won't. 'Climate risk is a multiplier,' says Sabbatelli-Goodyer. 'It makes all other risks—geopolitical, financial, operational—more volatile and more expensive.'
One of the biggest gaps is in how companies measure risk. Most existing models weren't built to handle climate volatility, especially economic ones like DICE (Dynamic Integrated Climate-Economy) which is know to underestimate certain risks. Traditional actuarial tools are outdated and inadequate
To address this challenge, FIS developed its Climate Risk Financial Modeler, leveraging engineering data from PwC and proprietary financial modeling technology. The tool simulates physical risks—floods, cyclones, heatwaves—and turns those into actionable financial metrics for corporate decision-makers.
'We model across three climate scenarios out to 2100, but we also break it down into five-year increments,' explains Sabbatelli-Goodyer. 'We're not just looking long-term—we're looking at what's happening now.'
The model also calculates insurance premium trajectories, helping companies understand not just potential losses but rising costs of coverage. In an era where "uninsurability" is becoming reality, this isn't niche analysis—it's essential risk management. 'Even in a net-zero world,' Sabbatelli-Goodyer warns, 'extreme weather doesn't go away. It's just a question of how much worse it gets.'.
That FIS's climate risk operation sits within its Capital Markets division is telling. Climate exposure is no longer confined to sustainability reports—it's showing up in loan portfolios, asset valuations, and market volatility.
From stranded real estate assets in flood zones, supply-chain breakdowns affecting corporate bonds, or heat stress reducing labor productivity, the financial fallout is vast. Future iterations of the FIS model will assess impacts such as livestock vulnerability, heat stress on labor, and supply chain disruptions. 'We're working on expanding to areas like solar panel damage from hail, or the financial impact of relocating supply routes,' says Sabbatelli-Goodyer.
In this new climate-driven financial era, transparency and resilience aren't just ethical responsibilities—they're strategic imperatives. Climate risk is no longer a speculative concern or a branding issue. It's embedded in financial systems and operational exposure.
The smartest firms will integrate it into core business functions—from treasury to operations—not just silo it in ESG or sustainability departments. Because inaction on climate isn't just morally questionable or politically fraught—it's a liability.