“Face reality as it is, not as it was or as you wish it to be.”
Jack Welsh
Living in a financial hub, lots of my friends and family members work in and around the banking ecosystem. When it comes down to it, my entire community depends on the financial sector. But the health of banks affects all of us. When a handful of mid-sized banks failed in 2023, it sent shockwaves through the economy. So when I read that some banks are at risk from climate change, I had to dig in to find out more.
Climate risk
The Federal Reserve recently did a pilot study looking at how six major US banks are managing the financial risks of climate change. An organization called First Street just completed a similar study on a larger group of banks using their own Climate Risk Financial Modeling (CRFM) tool.
First Street’s mission is to “connect climate risk to financial risk”. They offer tools to individuals, corporations, and government agencies to help find potential risks to property from the hazards of a warmer world.
The report from First Street is called Portfolio Pressures, and it outlines how “57 banks, representing $627 billion in real estate loans, are exposed to material financial risk”. Whoa. Climate change reaches way beyond extreme weather events.
Some banks are at risk
Smaller banks, whose loans are more concentrated in one geographic area, appear to be more at risk than those with diverse portfolios. This makes sense even to my non-financial brain. Events like floods, wildfires, and hurricanes tend to impact one region at a time. But do we have a full understanding of which regions are sitting ducks? The flooding in the mountains of North Carolina last month is just one example that challenges our assumptions about which areas are safe from extreme weather events.
Everything in life involves some amount of risk, and many risks are worth taking. Getting a handle on vulnerabilities to climate change is important for individuals and companies alike. As Jack Welsh says, we need to face reality as it is. One thing we can bank on: the number and severity of climate-fueled extreme weather events is on the rise. The risk to people and property will continue to increase until the warming trend reverses.
Let’s do something about climate change. Learn about it. Think about it. Talk about it.