Financial sector fails to account for climate risks when granting loans, insurance – supervisors

Banks and insurers have not been sufficiently accounting for the impacts of climate change, according to a risk report by the Federal Financial Supervisory Authority (BaFin). Financial authorities need better risk management for natural disasters, the authority warned, as extreme weather events could mean loans are not paid back and insurers might have to shoulder enormous claims, the country's financial watchdog institution said. "Companies in the financial sector need to look more closely at the physical risks of climate change," said BaFin head Mark Branson, Süddeutsche Zeitung reported.

The supervising authority has largely focused on so-called transitory risks when it comes to climate topics, for example loans for coal-fired power plants that have to be written off as the fossil fuel is phased out, Süddeutsche Zeitung reported. However, the BaFin has now warned of the physical risks of climate change, saying that while there has been progress with companies manging their sustainability risks, the financial sector must prepare for worsening consequences as politicians are doing too little to mitigate global warming.

"So far, we have underestimated the physical risks in regulation," Branson said. He added that many financial companies lacked the data to fully assess the risks, such as a customer's location, which could be assessed against flood-risks.

Without consistent measures to adapt to climate change and strengthen prevention, the German Insurance Association (GDV) expects homeowners’ insurance premiums to double in the next ten years through the effects of climate change alone.