Assessing Climate Risk

David Carlin

Head of Climate Risk

In this video, David explores the escalating risks of climate change and their impact on financial institutions. He breaks down key insights from COP28, the role of IPCC scenarios in projecting future climate pathways, and the dangers of climate tipping points. He explains why financial institutions must integrate climate and nature risks into their strategies and how specialised tools can help navigate uncertainty for a more resilient, sustainable future.

Climate Crisis

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Assessing Climate Risk

15 mins 9 secs

Key learning objectives:

Understand the escalating nature of climate-related risks and how they intersect with financial systems
Understand the role of IPCC scenarios and integrated assessment models in projecting future climate pathways
Outline key climate tipping points and their potential irreversible impacts on ecosystems and economies
Understand the importance of incorporating climate and nature risks into financial decision-making through dedicated tools and frameworks

Overview:

Climate risk is escalating, with financial institutions increasingly exposed to environmental shocks and systemic shifts. Outcomes from COP28, such as the global call to transition away from fossil fuels, underline the urgency of action. Climate models and IPCC scenarios outline diverging futures, from low-emissions pathways enabling a 1.5°C world to high-emissions routes triggering severe warming. Yet models alone cannot fully account for tipping points, critical thresholds that, once crossed, cause irreversible change, like collapsing ice sheets or Amazon forest dieback. Financial institutions must integrate climate and nature risks into strategy, using specialised tools to navigate uncertainty and drive resilient, sustainable decision-making.

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Summary

Why must financial institutions take climate risk seriously?

Climate change poses serious physical and transition risks that affect asset values, economic stability, and global financial systems. With extreme weather events, ecosystem disruption, and regulatory shifts on the rise, integrating climate risk into financial planning is no longer optional, it’s essential for long-term resilience, accurate pricing, and responsible investment.

What are climate models and what do they help us understand?

Climate models, including integrated assessment models (IAMs), are critical tools that combine data from multiple systems, economic, social, technological, and environmental, to simulate how human choices may influence the planet’s climate future. IAMs are particularly valuable because they connect emissions pathways with socioeconomic developments, allowing us to explore how factors like policy ambition, population growth, energy use, and technology adoption interact. These models underpin the five widely used IPCC scenarios: SSP1-1.9, SSP1-2.6, SSP2-4.5, SSP3-7.0, and SSP5-8.5. Each combines a socioeconomic pathway (SSP) with a representative concentration pathway (RCP), projecting different levels of radiative forcing. Lower scenarios (SSP1-1.9 and 2.6) assume strong global cooperation, sustainable growth, and rapid decarbonisation, aiming to keep warming below 2°C. In contrast, higher-emissions scenarios like SSP3-7.0 and SSP5-8.5 assume fragmented international efforts and continued reliance on fossil fuels, with potential temperature increases exceeding 5°C by 2100. These models are essential for understanding trade-offs between actions and outcomes and for informing policy, investment, and risk decisions.

What are climate tipping points and why are they dangerous?

Climate tipping points are thresholds in the Earth system that, once crossed, trigger irreversible changes, like rapid ice sheet collapse or Amazon rainforest dieback. These shifts are driven by feedback loops that can continue even after the original cause is removed. Their unpredictability, scale, and potential to accelerate global warming make them a severe risk.

How can financial institutions assess and manage these complex risks?

Financial institutions are turning to specialised tools, scenarios, and guidance, like those from UNEP FI’s Risk Centre, to embed climate and nature risks into their risk management frameworks. Resources such as the Climate Risk Landscape Report and Climate Tools Dashboard offer insights into both physical and transition risks, helping firms make informed, forward-looking decisions.

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David Carlin

David Carlin is an acknowledged authority on climate change and its implications for the financial system. He is the founder of D. A. Carlin and Company, an advisor to governments, corporates, and financial institutions on climate and ESG topics. He has authored numerous reports that provide practical tools for financial actors looking to address climate change and has run capacity-building programs for financial institutions and supervisors around the world. David led the creation of UN Environment Programme’s- Finance Initiative (UNEP FI)’s Risk Centre as the head of Risk. Over the past years, he has worked with over 100 global banks, investors, and insurers on climate scenarios, climate risk assessments, and climate governance. He has been an advisor to UNEP FI’s TNFD pilot program on nature and biodiversity related risks, the Net-Zero Banking Alliance (NZBA), and the Glasgow Financial Alliances for Net Zero (GFANZ). David is also a contributor to Forbes and a senior associate at Cambridge’s Institute for Sustainability Leadership (CISL) as well as a visiting fellow at King’s College London. David has worked as a Principal in Finance, Risk, and Public Policy for Oliver Wyman and in Model Risk Management for PNC Bank. His background is in quantitative modeling and decision science.

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