Theurer: Climate, biodiversity pose new banking challenges
Michael Theurer, Member of the Executive Board of the Deutsche Bundesbank, highlighted the growing financial challenges for the banking sector stemming from climate change and biodiversity loss. Speaking at a conference in Paris, he emphasized the need for adaptation and new risk management approaches grounded in core mandates.
From ambition to adaptation
Michael Theurer, from the Deutsche Bundesbank, opened a research conference by noting the sobering scientific evidence on climate change and environmental degradation.
He emphasized that central banks and supervisors must ground their engagement on climate and nature-related risks firmly in their core mandates of price and financial stability, avoiding overreach into governmental domains to preserve independence.
Theurer stated that the Paris Agreement's 1.5-degree Celsius target is now, according to most current models, likely out of reach.
This reality demands both realism and action, acknowledging the likelihood of more frequent and severe physical climate impacts such as heatwaves, droughts, and floods.
While mitigation efforts remain essential, realism also implies that adaptation – preparing economies and financial systems for a warmer, more volatile climate – must become a primary focus.
This shift means financial institutions must now consider not only transition risks but also the physical risks that will materialize as the climate continues to change, alongside the required adaptation measures.
Adaptation costs and bank resilience
With the 1.5-degree target largely out of reach, Theurer emphasized that adaptation costs and their impact on financial stability are moving into focus.
He noted that while companies implement measures like flood protection, many still accept significant residual risks, which can accumulate on bank balance sheets.
Insurance solutions may also prove deceptive if reinsurers restrict coverage or raise premiums sharply.
Climate shocks often affect entire value chains, undermining conventional point-in-time risk assumptions and turning isolated risks into system-wide stress.
Theurer highlighted that adaptation financing is severely underfunded, with private investment remaining insufficient despite the financial sector's crucial role in mobilizing capital.
A recent study found that 88 percent of 50 large commercial banks do not adequately address adaptation risks, underscoring direct implications for price and financial stability.
Banks must therefore enhance their understanding of physical climate risks, help finance adaptation, and recognize the innovation opportunities in climate-resilient technologies and financial products.
Beyond climate: Nature's hidden risks
Theurer's speech serves as a stark reminder that environmental risks extend far beyond carbon emissions, introducing complex, unpriced factors into financial stability.
While the banking sector has begun to grapple with climate transition, the integration of biodiversity loss into risk frameworks remains nascent and largely theoretical.
This broader perspective is crucial, yet its practical implementation will demand significant methodological innovation and a fundamental shift in how financial institutions assess systemic risk.