Why Climate Governance Matters

They provide enforceable structures that integrate climate concerns into environmental, energy, and economic laws. Governance ensures coordination, legislation sets binding obligations, and litigation enforces accountability, compensation, and rights protections. Together, they accelerate the shift toward low-carbon economies and safeguard justice for those most affected by climate change.

Physical risks include asset destruction, business disruption, and reconstruction costs following extreme weather events. Transition risks arise from regulatory shifts, technological changes, and evolving consumer preferences. Both channels erode asset values, increase defaults, and destabilise financial institutions, with feedback loops amplifying losses across equities, bonds, loans, and insurance.

Climate risks emerge through two main channels: physical and transition. Physical risks include extreme weather, floods, droughts, and heatwaves that disrupt production, damage assets, and increase insurance and reconstruction costs. Transition risks stem from the rapid policy, technology, and consumer shifts required to achieve a low-carbon economy. These create stranded assets, such as coal or oil reserves that lose value, along with higher energy costs, reallocation of capital, and structural industry changes. Together, these risks ripple across economies: reducing profitability, lowering property and corporate valuations, and driving litigation over climate liability. For financial institutions, this translates into heightened credit defaults in loan portfolios, declining asset prices in equities and bonds, rising underwriting losses, and operational risks. The compounding effect can destabilise the financial system, triggering feedback loops that worsen economic performance and intensify systemic risk.

Spain’s 2021 Climate Change and Energy Transition Law mandates emissions cuts, bans new hydrocarbon exploration, and sets deadlines for zero-emission vehicles, reshaping energy, automotive, and infrastructure sectors. The UK’s Pension Schemes Act of 2021 compels TCFD-aligned disclosures, pushing funds like Worcestershire Pension Fund to shift capital into low-carbon equities, forestry, and climate-focused strategies. These cases demonstrate how governance both steers economies toward decarbonisation and alters investment landscapes.