Extreme weather events are no longer marginal risks, and the banking sector is slow to take stock of the situation.

With the increase in floods, fires, and storms, the climate crisis could become the next time bomb for the financial system, warns actuary Arthur Charpentier in an op-ed in Le Monde.

Faced with the increasing frequency of natural disasters, insurers have already sounded the alarm: climate change has become a major economic risk. Yet the banking world continues to ignore the warning signs while continuing to provide massive financing to fossil fuel industries. This paradox could precipitate a new global financial crisis, the contours of which are already visible.

For several years, insurance companies have been warning that extreme weather events are no longer marginal risks, but are now a structural, unavoidable fact with systemic impacts. The continuous increase in claims—floods, fires, storms—is prompting some to reduce or cease their activities in the most vulnerable areas, such as California and Florida. The banking sector, however, has been slow to fully grasp the significance of this shift. While insurers absorb the shocks, banks could spread the effects.

Climate change is no longer just an environmental threat; it is an unprecedented financial danger. Droughts, rising sea levels, heat waves, and hurricanes are causing lasting disruption to the real economy. They affect crops, destroy infrastructure, devalue real estate, and cause population displacement. These disruptions lead to loss of income, payment defaults, premium increases, and, ultimately, growing instability in financial systems.

Hard on health and the economy

The year 2023 provided another example: insured losses reached nearly $100 billion (€85 billion), with total economic damage of $280 billion, according to reinsurer Swiss Re. In 2024, damages rose further to $417 billion, of which $154 billion was insured, according to its counterparts Gallagher Re and Munich Re. In the United States, 27 disasters each caused more than $1 billion in damage in a year marked by global heat records.

And 2025 looks set to be just as critical. In June, Europe experienced an exceptional heatwave, with temperatures exceeding 42°C in several southern countries and reaching 45°C in Spain and Portugal. According to the European Centre for Medium-Range Weather Forecasts and the Max Planck Institute, this phenomenon is part of an earlier seasonal cycle, heralding a particularly challenging summer for health, the economy, and infrastructure.

Despite these signals, banking models continue to underestimate these risks. Credit analyses, stress tests, and profitability calculations rarely take into account extreme, repeated, or interconnected scenarios.

Yet the chain reactions are obvious: a flood destroys a neighborhood, property loses its value, borrowers default, guarantees collapse. A drought ruins crops, farmers can no longer repay their loans, local authorities lose revenue, banks reduce credit. The shock spreads throughout the economy.

Massive financing of the fossil fuel sector

This vulnerability is amplified by the interconnectedness of markets. A real estate crisis in Asia can destabilize European funds. A surge in agricultural prices caused by a poor harvest in Latin America fuels inflation elsewhere. A hurricane in the Gulf of Mexico is enough to drive up energy prices. By simultaneously affecting several sectors and regions, climate change becomes a potential trigger for global crisis.

Small and medium-sized enterprises are the most exposed. With little insurance and insufficient reserves, they are the first victims of disruptions: a power outage, a destroyed warehouse, a closed road, and their business can come to a halt. Yet they represent an essential part of local employment and economic vitality. Their disappearance fuels deindustrialization, regional inequalities, and precariousness.

In this context, the position of the major banks is becoming difficult to defend. Admittedly, they are increasingly recognizing climate risks. Some publish ESG reports [on environmental, social, and governance practices], join initiatives such as the Glasgow Financial Alliance for Net Zero (Gfanz), or set carbon neutrality targets. But at the same time, they continue to provide massive financing to the fossil fuel sectors. According to the report “Banking on Climate Chaos” (2023), the world’s 60 largest banks granted nearly $7 trillion (nearly €6 trillion) to fossil fuels between 2016 and 2022, well after the signing of the Paris Climate Agreement.

Assuming systemic responsibility

This double standard reveals a profound contradiction. While they identify future threats, banks continue to fuel the causes of those very threats: oil, gas, coal, aviation, and combustion-engine vehicles. This logic of immediate profitability undermines their own long-term stability. By financing a carbon-intensive and extractive growth model, they are validating the continuation of a system whose destructive effects are now well established.

Calls for reform of the financial system are growing. The European Central Bank, the Bank of England, and the Bank for International Settlements (BIS) are insisting on the integration of climate risks into prudential rules and asset valuations. But progress remains slow, particularly in terms of divestment from fossil fuels and redirection toward sustainable investments.

It is no longer just a question of better risk management, but of assuming systemic responsibility. The climate could be the cause of the next major financial crisis. This time, the players will not be able to say they were not warned. The data is known, the trends are documented, and the tools are available. What is lacking is the political and financial will to break with a growth model that has become, in many ways, unsustainable.

Arthur Charpentier is an actuary, professor of actuarial mathematics at the University of Quebec in Montreal, and leader of the research project on insurance and equity, funded by the SCOR Foundation for Science and Louis Bachelier Fellow.


OpenEdition suggests that you cite this post as follows:
Arthur Charpentier (July 9, 2025). Extreme weather events are no longer marginal risks, and the banking sector is slow to take stock of the situation. Freakonometrics. Retrieved December 11, 2025 from https://doi.org/10.58079/14b2c


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