Extreme weather is moving from a distant environmental concern to a direct financial risk for banks and other financial institutions, analysts from Jupiter Intelligence said during a recent ProSight webinar. Risk managers increasingly recognize that hurricanes, floods, wildfires and other events can disrupt borrowers’ cash flows and affect the value of the assets securing loans.
“Financial institutions, when they talk about adjusting for extreme weather risk, are fundamentally trying to understand the stability of cash flows and asset valuations under this uncertainty paradigm,” said Wahib Ghazni, lead financial economist at Jupiter.
Some institutions are beginning to incorporate forward-looking weather and climate data into financial models that traditionally relied on historical averages. Their goal is to understand how physical risks translate into changes in credit performance, asset valuations and portfolio resilience.
In practical terms, Ghazni said, lenders and investors are asking how climate-related events could affect borrowers’ ability to repay debt and companies’ financial outlooks.
“If a climate event occurs, whether it’s a hurricane, wildfire or flood, what does that mean for their loan payments? What does that mean for their bond servicing? What does that mean for their earnings outlook going forward?” he said.
One persistent misconception, Ghazni added, is the tendency to treat climate risk primarily as a regulatory or disclosure issue.
“A lot of times boardrooms are thinking that this is just a compliance issue,” he said. “But climate risk is not static, and it compounds. It accelerates.”
That distinction matters because the financial consequences extend well beyond reporting requirements. Rising losses from extreme weather events are already affecting insurance markets, operating costs and asset values.
“This is not a disclosure problem,” Ghazni said. “This is a valuation and a solvency problem.”
Insurance Markets Signal Growing Exposure
Insurance markets have become one of the clearest ways physical climate risks reach financial institutions. In several parts of the United States, insurers have raised premiums sharply or reduced coverage in areas exposed to hurricanes, wildfires or flooding.
Kevin Cei, head of customer success and solutions at Jupiter Intelligence, said those developments are prompting banks to rethink how they incorporate physical risks into their decision-making.
“A lot of the banks have reprioritized, moving away from the regulatory requirements and focusing on business decision making,” Cei said.
Insurance costs can quickly affect borrowers and lenders alike. When premiums rise sharply or coverage becomes unavailable, the economics of property ownership fundamentally changes.
“These insurance rates are increasing at a very high rate in many of the areas across the United States,” Cei said. “And we’re seeing what those downstream impacts are.”
The effects can ripple through credit portfolios. Higher insurance costs can increase operating expenses for property owners, which in turn may affect their ability to service debt.
Cei said financial institutions need to understand how those developments translate into financial risk.
One consequence may be changes in asset values. Higher insurance costs or greater exposure to extreme weather can make properties less attractive to buyers or investors, potentially affecting resale values and loan-to-value ratios.
Cei said the effect often comes down to operating economics. Higher insurance premiums, utility costs or other expenses can increase the cost of owning a home, which can affect what buyers are willing to pay. For commercial properties, similar pressures can reduce net operating income, a key driver of asset valuations.
“If you’ve got asset values that are changing, that could change the dynamic between the amount the borrower owes and the market value of the asset,” Cei said.
Marking Climate Risk Across Loan Portfolios
To address those questions, some institutions are beginning to incorporate climate-adjusted asset values into their credit analysis. Comparing traditional loan-to-value ratios with values that account for future weather risks can help lenders identify loans or regions where exposures may be higher than previously understood.
That approach can also reveal concentrations of risk within a portfolio. Geographic exposure to extreme weather, insurance coverage gaps and changes in operating costs can all influence how risk accumulates across a lending book.
Cei said the analysis can also help banks take a more strategic view of their lending portfolios. By mapping climate risks at the asset level, institutions can identify where exposures are increasing and where new opportunities may emerge. Banks can do this on their own portfolios, Cei said. “Banks are creating heat maps that are not just about the general hazards but where the highest exposures of potential loan defaults due to climate are.”
Over time, he said, institutions can use that insight to shape their portfolios deliberately rather than reacting after losses occur. “How do you proactively start shaping that portfolio toward where those opportunities are to gain market share?” Cei said.
Potential uses for climate-related data extend beyond credit analysis, Cei added. Financial institutions are also exploring how the same information can inform investment portfolios, operational planning and other areas of risk management.
“What we’ve seen with climate data and extreme risk data is that there’s so many different areas within the organization where this can be used,” he said.
In some cases, institutions are applying familiar financial risk frameworks—such as stress testing or value-at-risk analysis—to climate-related exposures. Those tools allow risk managers to examine how extreme events could affect portfolios under severe scenarios.
For Ghazni, the key point is that financial institutions can anticipate many of these impacts if they incorporate physical climate risks into their analysis.
“These financial shocks do not have to come as a surprise. With forward-looking climate risk analysis, institutions can see many of these impacts before they materialize,” he said.
As extreme weather events grow more frequent and costly, the integration of physical climate risk into financial analysis remains a developing discipline. But for many risk managers, the central question is shifting from whether these risks matter to how quickly institutions can incorporate them into everyday financial decisions.
By: Debra Cope
