Towards an alternative approach in finance to climate risks: taking uncertainties fully into account

4 November 2019 - Climate Report - By : Vivian DEPOUES, PhD / Michel CARDONA / Morgane NICOL / Vincent BOUCHET (Groupe Caisse des Dépôts)

It is no easy task to take climate risks – transition risks and physical risks – into account in financial management practices. As this note shows from the example of banking activities, the intrinsic characteristics of these risks – which are long-term and cannot be assigned a probability and for which there are no historical data – are often difficult to reconcile with standard processes based on probabilities established from the past. But uncertainty cannot be a pretext for inaction. The framework of decision-making theory in an uncertain world provides alternative approaches and tools for making decisions despite uncertainties. Although these approaches have been developed in contexts that differ from financial activities, we defend the idea that what underpins them – and in particular the importance given to the criteria of adaptability and robustness of management choices – could be used by financial players. We suggest avenues for discussion in this regard concerning both banking strategy and regulation.

In the first part of this note, we give an overview of the transition risks and the physical climate risks and the three main sources of uncertainty associated with them. We then look at the standard risk management processes that banks use before showing why it is particularly difficult to factor in climate risks. We then review several decision-support tools used in other sectors. Lastly, in the conclusion, we suggest ways to adapt these tools to the finance sector.

This document is intended to serve as a basis for exchange between banking sector risk management practitioners and the regulator, as well as operatives and researchers who have already applied exploratory approaches in other areas. We believe it is crucial to discuss the conditions that must be met to make such developments possible in order to improve the consideration of climate risks in the financing of the economy. Although this work is exploratory, it also opens up avenues for case studies to be conducted.

 

Towards an alternative approach in finance to climate risks: taking uncertainties fully into account Download
I4CE Contacts
Vivian DEPOUES, PhD
Vivian DEPOUES, PhD
Research Lead – Adaptation to climate change Email
Michel CARDONA
Michel CARDONA
Senior associate Expert – Financial Sector, Risks and Climate Change Email
To learn more
  • 03/21/2025 Foreword of the week
    Adaptation finance in the EU: what role for insurers and other private financial institutions?

    The President of the European Commission, Ursula von der Leyen, has committed to presenting a European Climate Adaptation Plan in 2026. The European Commission has previously emphasised public budgets as the main source of coverage for climate-related disasters. But if both the EU’s and member states’ budgets are strained by competing investment priorities and high debt levels in some cases, what are the complementary avenues for financing adaptation in the EU? How can private financial actors, such as banks, insurance companies or asset management firms, support adaptation efforts, not only to ensure resilience (i.e. recovery) from climate disasters, but also to prevent impacts before they arrive?

  • 03/20/2025
    The adaptation of real estate: what roles can the financial sector play?

    Premier état des lieux et pistes sur les banques, assureurs, gestionnaires d’actifs Un besoin de clarifier le rôle des banques, assureurs dommage et gestionnaires d’actifs dans l’adaptation de l’immobilier. Alors que les effets du changement climatique sont de plus en plus manifestes, les parties prenantes de l’immobilier doivent se préparer aux conséquences du réchauffement climatique qui pourrait atteindre, d’ici la fin du siècle en France, +4°C.

  • 03/04/2025
    The adaptation reflex in public investment in practice: Pathway for 2025 and prospects

    The 3rd French national climate change adaptation plan (PNACC3) seeks to generalize an “adaptation reflex” in all public investments and all public support for investment. Operationalizing this ambition is essential for Stop investing in infrastructure, buildings and equipment that will not be ready to cope with the consequences of climate change; Seize the best opportunities available by taking advantage of investments already planned to strengthen the level of adaptation of the French economy at lower cost. 

See all publications
Press contact Amélie FRITZ Head of Communication and press relations Email
Subscribe to our mailing list :
I register !
Subscribe to our newsletter
Once a week, receive all the information on climate economics
I register !
Fermer