In the run-up to COP30: Climate tipping points also threaten the financial system

This year's COP30 World Climate Conference will begin in a few days in Belém, Brazil. “Last year's conference in Baku was heavily influenced by the interests of oil-producing countries and produced few concrete results in the fight against climate change,” says Dr. Heinz-Werner Rapp, founder and director of the FERI Cognitive Finance Institute. At the same time, the process of global warming is accelerating and intensifying: “So-called climate tipping points are looming menacingly,” explains Rapp. When critical temperature thresholds, known as climate tipping points, are exceeded, tipping elements, essential subsystems of the Earth's climate, abruptly and usually irreversibly transition to a new state. “This dynamic has very concrete consequences—not only for human habitats and planetary stability, but also for the economy, society, and the financial system,” emphasizes Rapp, who recently published a comprehensive and broadly based analysis of the problem of climate tipping points with the Cognitive Finance Institute.

According to Rapp, a long-overdue reassessment of rapidly increasing climate risks, i.e., a repricing of risk, which is already becoming apparent in some areas, could put important areas of the global banking and credit system under acute pressure. There is currently still a “blind spot” here: “Even though the increasing climate risks are generally known, many of the consequential costs are largely ignored or greatly underestimated on the capital markets – a short-sighted mistake with long-term consequences.” 

Pay greater attention to financial and systemic risks

With COP30 in mind, Rapp calls for a rethink among the decision-makers represented there—in particular, explicit consideration of impending tipping points and tipping cascades in the global climate system. Politicians and the public should recognize the imminent climate risks and take targeted measures to strengthen climate resilience. “Capital market players should also recognize the direct link between rapidly increasing climate damage and the resulting financial and systemic risks, and consistently price these in,” says Rapp. 

The first steps in this direction are already visible: “A change in risk perception is beginning to take hold in parts of the global financial system. The drivers are large insurance companies, but also central banks and other supervisory or regulatory authorities.” The primary focus is on integrating meaningful metrics for recording and assessing increasing climate risks – for example, based on the concept of “planetary solvency.” However, such approaches are still in their early stages. Rapp explains: “Above all, we need precise climate data and models for ‘converting’ dynamic climate effects into potential financial risks. This is particularly true for rapidly escalating risk cascades, which are becoming increasingly likely due to the dynamics of climate tipping points.” 

The German study „Climate Tipping Points – Das Umkippen essentieller Klimasysteme als globales Risiko“ provides investors and entrepreneurs with in-depth insights into the underlying issues and supports them in analyzing and evaluating future challenges. A short version of the study is available in German for download on this page.