This article has been reviewed according to Science X's editorial process and policies. Editors have highlighted the following attributes while ensuring the content's credibility: Whether buying a home or opening a local business, affordability is no longer the only question people should be asking, says Kristle Romero Cortes, an associate professor. They should also consider what their property might look like in 10 or 20 years.
"Whether or not it will be underwater or on fire," she says. As a finance researcher at the UNSW Sydney Business School and senior deputy director of the UNSW Institute for Climate Risk & Response, Romero Cortes says climate change is increasingly a financial problem. She is the co-author of a new study suggesting banks adjust their behavior in anticipation of physical climate risk—before storms, floods or fires translate into financial losses.
"The finance side of climate risk isn't just 'disaster happens, then bank suffers,'" Romero Cortes says. "It's priced in ahead of time, which is also how it ends up reshaping who can borrow and where." Much of the existing research into climate change and banking starts after a disaster. After a storm hits, properties are destroyed, businesses close and borrowers struggle to repay loans.
Researchers examine what happened to banks and lending afterward. Romero Cortes and her co-authors instead used temperature records from across the United States (US) to develop a measure of what economists call systematic physical climate risk—broad changes in climate conditions that affect many places at once, making the risk difficult to avoid simply by spreading investments geographically. The measure was created from temperature data alone—not records of hurricanes, floods, fires or the financial losses they caused.
The researchers then tested whether those patterns predicted subsequent disasters. The results showed counties more exposed to broad temperature shifts subsequently experienced more disasters and greater damage. This allowed the team to connect changes in the physical climate with financial risk before losses had occurred.
They could then examine how exposed individual banks were to those risks and what they did in response. "The banks with greater exposure to physical climate risk held more capital and altered their lending behavior," Romero Cortes says. While climate change itself is global, its physical risks aren't evenly distributed.
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