Banks are on the front line in the war against climate change. Getting it wrong could destroy them.

There are more storms, more floods and more earthquakes – whatever Donald Trump thinks – but so far not enough for banks to be doing as much contingency planning as they probably need to.

What happens, for example, if a natural disaster closes down a major financial centre like London or New York?

In some global warming scenarios, temperatures could rise between 4 and 7 degrees centigrade leading to a hit of between $7000bn and $43,000bn to global stocks and assets. This potential “meltdown” is the subject of The Banker’s September cover story.

But even if – by a miracle – everyone starts becoming environmentally aware and we avoid meltdown, the restructuring of the economy needed to do this brings risks of its own.

To achieve the 2 degree centigrade limit envisioned by the 2015 Paris climate accord means turning existing industry upside down – transportation, infrastructure, power generation, iron and steel would all be massively affected. Banks need to be considering the impact to their balance sheets.

Under clean-energy scenarios, oil majors become rather less blue-chip to lend to than those engaged in the technologies of the future – for example renewable energy, electric cars and insulation. In these sectors, there are big opportunities with one estimate putting the investment needed to transition to a lower carbon economy at $1000bn each year for the foreseeable future. This figure is not something dreamed up by an idealistically green organisation – it comes from the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), chaired by Michael Bloomberg.

But while government policy is the key to battling climate change, sudden reversals in government policy represent a risk as it can make a new industry viable one day and facing problems the next. UK onshore windfarms have suffered since the government withdrew subsidies in 2016.

All this provides huge challenges for banks’ risks departments. They need models for vastly different scenarios. At one end of the scale natural disasters cause massive economic damage, at the other the economy is completely restructured with many loans going bad. Time for risk managers to go into a huddle and stay there for a long time.

Brian Caplen is the editor of The BankerFollow him on Twitter @BrianCaplen

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