As of 2025, the World Economic Forum ranks misinformation and disinformation as the most urgent short-term global threats. While over the next decade, environmental risks dominate, with extreme weather, biodiversity loss, ecosystem collapse, critical shifts in Earth systems, and resource shortages leading the list of long-term risks.
With disinformation regarding the cost of extreme weather events increasing under the Trump Administration, paired with egregious efforts to reverse the expansion of clean energy and climate action, unaddressed climate risks pose systemic threats to financial stability.
Climate Risks as Drivers of Systemic Financial Threats
Climate related risks can result in microeconomic and macroeconomic threats, this article largely focuses on the macroeconomic impacts.
Climate risks are divided into two categories: physical risks and transition risks.
Physical risks: Physical risks can be characterized as acute or chronic, and stem from the direct effects of climate change. Acute physical risks can range from floods, wildfires and storms while chronic physical risks include rising temperatures, sea level rise, and precipitation patterns that can impact crop yields and water scarcity. These events can destroy infrastructure, disrupt supply chains, and lead to large-scale asset losses.
Transition risks: There are four kinds of transition risks: regulatory, technological, market, and reputational. These arise from the economic, technological and regulatory adjustments required to align with global emissions targets and the shift to a low-carbon economy. Policy changes, technological disruption, and changes in market preferences can lead to stranded assets, sudden changes in asset valuations, and increased legal liabilities for firms exposed to fossil fuels.
The financial effects of climate risks can be forecasted in various warming scenarios as well as policy and socioeconomic scenarios using scenario analysis. It is best practice to use Representative Concentration Pathways (RCPs) and Shared Socioeconomic Pathways (SSPs) as defined by the Intergovernmental Panel on Climate Change (IPCC) to explore climate impacts in various plausible futures.
In high warming scenarios, physicals risks present the highest financial risks due to the fact that increased warming will lead to a higher number of costly natural disasters that disrupt supply chains and damage infrastructure. Whereas, in low warming scenarios, transition risks are higher as there will be a more rapid and distinct shift towards renewable energy and more sustainable practices.
Physical risks differ from transition risks because of tipping points—critical thresholds in natural systems that, once crossed, can trigger irreversible change. While the timing of such tipping points is debated, scientists warn of potentially catastrophic impacts if emissions remain unchecked, with some predicting a point of no return by 2035.
Both risk types can destabilize the financial system via several channels:
- Credit risk: Rising defaults as firms and households struggle with climate damages or the declining value of fossil fuel assets.
- Liquidity risk: Market freezes as uncertainty spikes and asset values become volatile. For example, after hurricanes or floods, households and businesses rapidly withdraw deposits to fund recovery, straining banks’ liquidity buffers.
- Underwriting risk: Insurance losses mount as more regions become uninsurable, undermining the business model of insurers and their ability to absorb shocks.
- Market risk: Rapid repricing of assets and increased volatility as investors reassess climate exposures.
Systemic climate risks are magnified by the interconnectedness of banks, insurers, and investment funds. Losses in one sector can quickly transmit through the financial system, triggering broader instability. For example, insurers retreating from high-risk regions can spark credit crunches, reduce lending, and depress property values, while banks exposed to fossil fuel assets may face sudden losses and liquidity strains.
These financial risks do not operate in isolation. Instead, they are amplified by political decisions, institutional structures, and the retreat of state-sponsored data collection and oversight.
Amplification Through Financial and Political Networks
With the recent announcement that The National Oceanic and Atmospheric Administration (NOAA) has ceased tracking the financial impact of weather events linked to climate change, including floods, wildfires, heat waves and hurricanes, it will become increasingly more difficult to assess current and future costs related to extreme weather events. This change is a result of decisions made by the Trump Administration, supporting their efforts to remove references to climate change from federal documents and resources.
Financial risks are traditionally incorporated into the financial system as a core element which influences investment decisions, market pricing and the general allocation of capital.
Currently, climate related risks are in the early developments of being appropriately tracked, measured, and managed within the global financial system as an increasing number of financial regulators recognize that climate change poses significant economic and financial risks.
For example, the European Union requiring companies to assess, report on, and track management of climate-related risks and their financial effects over a phased in timeline as part of the Corporate Sustainability Reporting Directive (CSRD).
As climate-related risk measurement, reporting and management is an emerging field itself with financial institutions highlighting that investors are underappreciating and underpricing climate-related risks, this decrease in reliable data is likely to exacerbate the underpricing of climate risks, leading to sudden, disruptive repricing in the future that could threaten financial stability.
Capitalism’s Structural Conflict with Climate Action as Evidenced by Transition Risks
Capitalism’s core feature of prioritizing short-term profit maximization directly conflicts with the long-term planning required for climate stability.
Transition risks emerge precisely because companies are incentivized to resist changes that threaten immediate returns, even when such changes are essential for long-term environmental and financial sustainability.
This creates what economists call “emergent contradictions,” where short-term economic gains lead to long-term environmental costs. The fossil fuel industry exemplifies this contradiction-remaining economically profitable while significantly driving carbon emissions that threaten planetary stability.
In a stark display of capitalism’s self-destructive nature, transition risks have fueled organized opposition to climate policy through political channels. For example, industry lobby groups have repeatedly succeeded in blocking regulations or carbon taxes, significantly delaying necessary climate action. This represents not just individual companies protecting their interests but a systemic feature of capitalism where concentrated economic interests can mobilize against policies that serve broader social needs.
Regulatory transition risks often stem from the introduction of carbon pricing or emissions regulations, which can lead to “a large decline in the value of fossil capital” and the phenomenon of “stranded assets.” These stranded assets reveal one of the clearest ways in which capitalism structurally resists climate action: rather than embracing transformation, industries have powerful financial incentives to delay, weaken, or derail climate policy in order to protect existing investments.
Although Environmental, Social, and Governance (ESG) frameworks, corporate sustainability, and stakeholder capitalism have emerged to align business with sustainability, their voluntary nature and inconsistent implementation have largely failed to produce systemic change.
This failure is particularly evident in the U.S., where the political landscape increasingly favors climate denial, fossil fuel expansion, and deregulation. In this context, many corporations are pulling back from ESG reporting, citing reputational risks, regulatory uncertainty, and rising costs, which highlights the limitations of voluntary compliance in a disinformation-driven, privatization-heavy system.
ESG reporting requires both effort and resources, compounded by the challenge of sourcing reliable climate data, these challenges are only intensifying in a political environment hostile to transparency and science.
In the corporate sustainability space, investments in climate action typically require a compelling business case that demonstrates either cost savings or a positive return on investment (ROI). These business cases must be socialized and approved internally, often facing resistance due to competing financial priorities.
However, a core problem remains: financial modeling in capitalist firms typically uses timeframes far shorter than those used in climate models. This misalignment leads companies to prioritize short-term profitability, often opting for inaction—even when the long-term risks of inaction are catastrophic.
The reality is this: the long-term cost of inaction far exceeds the upfront investment in mitigation or adaptation. Without decisive climate action:
- The natural resources essential for production will become too scarce or degraded to use.
- Transportation and distribution networks will be damaged or destroyed by extreme weather.
- Consumer markets will collapse as people are displaced—or, in some cases, cease to exist.
Policy Uncertainty and Investment Retraction
With a patriarchal capitalist leading the country, in the first quarter of 2025 alone, nearly $8 billion in clean energy projects were canceled, closed, or downsized, as manufacturers and investors responded to the rollback of tax credits and regulatory support. This marks a dramatic reversal from the surge in clean energy investment following the Inflation Reduction Act, and signals a broader hesitation to commit capital amid uncertain policy signals.
Economic Consequences:
- Stalled clean energy growth: The cancellation of large-scale projects in wind, solar, and battery manufacturing has slowed industry expansion and job creation.
- Increased exposure to fossil fuel risks: Delayed transition raises the risk that banks and insurers will be left holding stranded fossil fuel assets, amplifying credit and market risks.
- Reduced resilience to physical climate impacts: Without robust investment in mitigation and adaptation, uninsured losses from extreme weather events are expected to rise, straining public finances and deepening economic inequality.
- Systemic instability: Allianz and other major insurers warn that, as climate risks become uninsurable, the financial system faces the prospect of cascading failures in housing, credit, and investment markets-potentially threatening the foundations of capitalism itself.
The Self-Defeating Nature of Capitalism
Ironically, capitalism’s resistance to climate action threatens the system itself. As financial experts warn, continued failure to address climate change means “no more mortgages, no new real estate development, no long-term investment, no financial stability. The financial sector as we know it ceases to function. And with it, capitalism as we know it ceases to be viable.”
This demonstrates how transition risks represent not just evidence of capitalism’s resistance to climate action but also its potential self-destruction through that very resistance.
The intersection of environmental collapse, financial instability, and political resistance reveals a system on the brink. Without structural reform, both ecological and economic breakdowns are not only likely—they are mutually reinforcing.
