Summary
Why Financial Markets Underestimate Climate Risk
The systemic risks posed by climate change—particularly under scenarios of 3°C or more of global warming—are being dangerously underestimated by the financial sector. This report warns that, drawing parallels with the Global Financial Crisis, current models and risk assessments are deeply flawed, relying on outdated assumptions and linear projections that fail to capture the nonlinear, cascading impacts of a destabilised climate system.
The report highlights how climate-related financial disclosures and stress testing—while gaining traction—often fall short of confronting the real possibility of high-end warming and its consequences for economic and financial stability. It emphasises that warming of 3°C would likely lead to catastrophic disruptions across food systems, supply chains, insurance markets, and geopolitical stability—threatening not just individual institutions but the integrity of the global banking system itself.
In response, the report calls for a transformative shift in how the financial system approaches climate risk. This includes integrating worst-case scenarios into core modelling, rejecting incrementalism, and recognising that the safe operating space for finance depends on rapid, systemic decarbonisation. Failure to act decisively could result in a climate-driven financial collapse far more severe than any market crash to date.
Continued fossil fuel use is driving climate risks that threaten global financial stability, food systems, trade and insurance. Photo: Erickson/Shutterstock
Foreword by Sir David King
Renowned climate scientist Professor Sir David King FRS, founder of the Centre for Climate Repair at Cambridge and former UK Chief Scientific Advisor, authored the foreword to Degrees of Risk. King underscores the failure of decades of climate negotiations to halt rising emissions and warns that 3–4°C warming is not only unmanageable but an existential threat to civilisation.
He stresses that current financial regulations dangerously understate the true scale of climate risk. Calling for urgent action beyond disclosure, King insists the next 3–5 years are critical—and what we do now will determine humanity’s fate.
3–4°C warming is a threat not just to the banking system, but to the very survival of human civilisation.
report
Degrees of Risk
Financial systems risk collapse as climate models ignore cascading impacts of 3°C warming and systemic instability.
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About the Authors
David Spratt
Research Director and Climate Analyst
Author examining existential threats, policy failures and urgent mitigation requirements globally.
Ian Dunlop
Energy Expert and Strategic Advisor
Former executive advising decarbonisation, resource constraints and systemic economic transition risks.
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