US$150 billion per year. That’s the expected additional loss that the financial sector could face when climate action by companies is delayed, according to the launch report of a joint initiative by the Oxford Sustainable Finance Group at the University of Oxford and the non-profit think tank 2° Investing Initiative.
According to the study, part of a new initiative called the Climate Stress-Testing and Scenarios Project (CSTS), analyzed publicly listed companies in four of the most climate-critical sectors (power generation, oil & gas, coal production and the automotive industry) are insufficiently aligned with the net-zero transition. This means that even an early transition in 2026 is likely to be disorderly, with the overall estimated cost to the financial sector amounting to US$2.2 trillion. On top of that, for every year the transition is delayed, financial institutions could rack up additional costs of US$150 billion annually due to climate transition-related changes in market and credit risk. Since this initial analysis did not capture every sector, these costs represent a lower-bound estimate and could be considerably higher when factoring in both broader economy and non-public companies.
Critically, this annual additional cost increases non-linearly the more the transition is delayed – stressing the need for even more rapid action in order to minimize losses. However, this cost is not carried equally across the financial sector: the greatest cost is borne by financial institutions that have the highest portfolio exposure to firms most at risk from the transition. This also underlines the need for bottom-up stress tests with sufficient granularity to distinguish amongst financial institutions with exposure to the worst-performing firms.