Market still ‘wrong’ on climate

As business, government and nonprofit leaders debate the future of climate action ahead of the United Nations Climate Change Conference (COP30) in Brazil, the global economy remains vulnerable to acute and chronic climate-driven shocks whose impact could be more severe than that of the 2008 global financial crisis.

- Fiona Watson

At a time when many governments and businesses continue to underestimate and underprice physical climate risk, we must remember that neither financial markets nor regulators are always right. What if their current complacency about climate risks is catastrophically wrong?

The 2008 financial crisis and its aftermath showed how fast our expectations can be shattered. In the mid-2000s, deregulation and simplification were the norm: balance sheets were run thin, and profits and losses ran high. Financial engineering boomed as risks were packaged, diluted, and obfuscated, and as credit was given where it hadn’t been earned.

In the face of all this, expressions of concern were drowned out by the din of transactions. But the signs were there. The fundamentals were not right.

By late 2008, the global economy was teetering on the brink of collapse. In the space of days, longstanding banking giants were swept away. Only government bailouts prevented the entire financial system from melting down.

The post-crisis banking sector looks very different from the one that preceded it. Owing to tougher rules and tighter oversight, good governance and resilience restored trust in the banking sector. Long-term investors — pension funds and insurance companies — patiently endured years of expensive recovery before value was restored and dividends resumed. If the banks had gone, so, too, would those holdings, and most of today's financial system with them.

The post-crisis era was marked by collective humility and acceptance of systemic risk. This was reflected in the Financial Stability Board’s recognition in 2015 of climate change as perhaps the greatest systemic threat of all.