The challenges of modelling climate risk in a changing world
The outputs of climate models serve as inputs to financial models, compounding uncertainties and potentially rendering the final predictions for physical risk worthless
CLIMATE risk has emerged as one of the most formidable challenges of our time, affecting economies, financial systems and societies at large. From rare catastrophic physical events to sudden shifts in policy and consumer behaviour, the uncertainties inherent in climate risk make it incredibly difficult to model accurately.
In this column, I look into the complexities of modelling climate risk, focusing on both the physical and transition risks that arise from societal and political changes. I also consider the implications for financial risk management and economic resource allocation.
Regime change and the data problem
At the heart of physical climate risk modelling is the challenge of dealing with a rapidly changing climate regime. Historically, risk models have relied on extensive data sets that describe past events. However, with climate change, the evidence of future risk events is not yet present in the historical record.
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