Recent extreme weather events, including October’s devastating floods in Spain that killed at least 95 people, underscore the urgent need for adaptation and resilience in the face of climate change. 

While developed countries may have more resources to recover, developing nations are often left more vulnerable. The economic impacts of these events highlight the critical importance of understanding how climate change is reshaping the global economy and financial markets. 

By grasping this connection, we can work toward building a more resilient and sustainable future for all.

The world is grappling with a climate crisis that threatens not only our planet’s health but also the stability of our financial systems. As extreme weather events become more frequent and intense, the ripple effects on stock markets, individual investments and national economies are becoming increasingly apparent.

The stock market’s climate exposure

The stock market is a barometer of economic health, and climate change is casting a long shadow over its future. Companies across various sectors are vulnerable to climate-related risks, including:

• Physical risks: Extreme weather events like hurricanes, wildfires and floods can disrupt operations, damage assets and lead to significant financial losses. For example, extreme weather events can damage transportation infrastructure, causing disruptions, increased costs and broken supply chains.
• Transition risks: The shift toward a low-carbon economy can create challenges for businesses that rely on fossil fuels or outdated technologies. Moreover, companies may face legal action for contributing to climate change.

These risks can lead to market volatility, as investors become increasingly wary of companies with high climate exposure. 

As a result, the stock market may experience downturns, potentially impacting individual portfolios and pension funds.

Impact on individuals

Climate change is not just an environmental issue; it’s also a deeply personal one. 

As extreme weather events become more frequent and intense, individuals are increasingly experiencing the direct and indirect financial consequences. 

Hurricanes, wildfires, floods and other natural disasters can cause significant damage to homes, vehicles and personal belongings. Insurance premiums may increase, and deductibles may be insufficient to cover losses. 

Climate-related events can disrupt businesses, leading to job losses and income instability. Industries such as agriculture, tourism and fishing are particularly vulnerable. 

Extreme heat, air pollution and water scarcity can exacerbate health problems, leading to negative outcomes such as increased healthcare costs and potential loss of income due to illness. 

Threat to national financial stability

At the national level, climate change poses a serious threat to financial stability. 

Governments may need to allocate significant resources to address the consequences of climate change, such as rebuilding infrastructure and providing disaster relief. This can lead to increased public debt and strain government budgets.

Mitigating risks

To mitigate the financial risks of climate change, governments, businesses and investors must take proactive steps such as:

• Investing in climate-resilient infrastructure: Invest in the development and adoption of technologies for early detection and prevention of serious damage to infrastructure. Prioritize, build and strengthen infrastructure that can withstand extreme weather events.
• Local authorities must consider the climate impacts of evacuation and construction processes in cities, including reduced shading and increased heat emissions from air conditioning and transportation systems. These factors were found to have a significant impact on public health, causing increases in stroke and heart attacks.
• Transitioning to a low-carbon economy: Governments can implement policies that incentivize businesses to reduce their carbon emissions.
• Strengthening financial regulation: Regulators can require financial institutions to disclose their climate-related risks 
• Support research into new renewable energy technologies.
• Develop climate stress testing: Conduct stress tests on financial institutions to assess their resilience to climate-related shocks. This also includes developing a plan to address the significant public health risks associated with rising temperatures, such as pregnancy and childbirth complications, heart disease, malnutrition and epidemics.

The climate crisis is a pressing challenge that requires urgent action. With global temperatures expected to rise by 3 degrees Celsius by 2100, these factors become even more significant.

By understanding the financial risks associated with climate change and taking steps to mitigate them, we can protect our economies and ensure a more sustainable future. 

Yael Benvenisti is deputy CEO of InsurTech Israel.