Banks Urged To Merge Climate And Geopolitical Risk Strategies As Global Uncertainty Deepens Further

(MENAFN- AsiaNet News)

Financial institutions are facing a growing challenge as climate change and geopolitical instability increasingly converge into a shared source of risk. While often treated as separate threats, both are characterised by uncertainty, complex economic impacts and the potential to disrupt markets, supply chains and investment decisions.

According to emerging thinking in the financial sector, banks do not necessarily need entirely new frameworks to address these challenges. Instead, many of the tools already developed for climate risk management could be expanded to better capture geopolitical threats and the ways they interact with climate-related vulnerabilities.

The connection between the two issues is becoming harder to ignore. Geopolitical developments can influence the speed and direction of the global energy transition, while the consequences of climate change can contribute to resource shortages, migration pressures, social tensions and regional instability.

For banks, investors and regulators, the result is a more interconnected risk landscape where environmental and political disruptions can reinforce one another.

One of the clearest examples of this overlap is fossil fuel dependence. Around three-quarters of the world's population lives in countries that are net importers of fossil fuels. That reliance creates exposure not only to climate-related transition risks but also to geopolitical events that can trigger sudden energy price shocks and supply disruptions.

Companies dependent on fossil fuels face several layers of pressure simultaneously. These include changing regulations, carbon-pricing measures, technological shifts, evolving consumer demand and disruptions linked to global political tensions. Over time, those pressures can affect operating performance, financing conditions and long-term business strategies.

At the same time, efforts to reduce fossil fuel dependence introduce new considerations. Expanding renewable energy systems requires significant quantities of critical minerals such as lithium, copper and rare earth elements, creating a different set of concentration and supply-chain risks.

Policy Uncertainty Increasing Pressure On Long-Term Investment Decisions

The growing fragmentation of global politics is also creating challenges for financial institutions attempting to evaluate future risks.

Long-term investments depend heavily on predictable policy environments. Businesses and lenders typically require clarity regarding regulations, carbon costs and transition pathways before committing capital. However, geopolitical tensions and trade disputes can encourage governments to prioritise short-term industrial competitiveness and energy security objectives over longer-term climate goals.

In some fossil fuel-producing economies, climate policies are increasingly being weighed against immediate economic interests. This can result in delayed, altered or recalibrated transition measures, making it harder for banks and their clients to assess future regulatory conditions.

The consequences are significant. Changes to subsidies, trade barriers or industrial policies can influence financing costs and increase credit risk. For international financial institutions operating across multiple jurisdictions, varying standards and policy approaches further complicate risk assessments.

Climate and geopolitical risks ultimately appear through familiar channels such as credit, market and liquidity risks. Climate-related events including droughts, floods, heatwaves and displacement can weaken economic activity, interrupt supply chains and contribute to sovereign risk concerns.

Because many of these threats develop in ways that historical data alone cannot fully explain, institutions are increasingly turning to forward-looking analysis and scenario planning.

A key argument gaining support is that banks can build upon capabilities already created for climate risk management. Existing tools such as scenario analysis, supply-chain mapping, stress testing and stranded-asset assessments can also help identify vulnerabilities linked to geopolitical developments.

Supervisory authorities are already moving in that direction. The European Central Bank has incorporated geopolitical risk into its supervisory framework and asked banks to conduct reverse stress tests designed to identify scenarios capable of significantly weakening capital positions.

Experts argue that the next step is integrating the two risk categories more directly. A disorderly climate transition, for example, often reflects a breakdown in policy coordination, something that can be strongly influenced by geopolitical developments.

Rather than trying to predict precise outcomes, financial institutions are being encouraged to examine how different climate pathways and geopolitical conditions could interact. The goal is to better identify vulnerabilities, understand potential exposures and strengthen resilience in an increasingly fragmented and unpredictable global environment.

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