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The Impact of Climate Change on the Financial Services Sector

Climate change: it’s been a hot topic for years, impacting many different industries. The recent bush fires in Australia, for example, have created increasing buzz about the potential impact of not only these fires, but also future fires. Tsunami activity following a 7.7 magnitude earthquake in Jamaica led to many more questions. Around the world, people are questioning how climate change has the potential to impact their industries–and in the financial services sector, it has the potential to create enormous impact.

Throughout 2019, sustainability became an important facet of many financial investments and other financial services. Many investors are focused on businesses that are able to increase two key elements: positioning the business or investment for future growth, and mitigating the potential for disaster down the road. Climate change has made it increasingly difficult to predict what the world will look like in the future. Effective businesses and investors, however, are focused on preparing for what they can–and it’s creating change across the financial services sector.

Flood and Fire Insurance

Climate risk poses substantial investment risk, as well. An unpredictable climate can make it difficult to predict what a given area will require in the future. Consider, for example, fire and flood insurance. In flood-prone areas, flood insurance is incredibly important. Likewise, areas that are prone to wildfires may need a readier availability of fire insurance. Climate change, however, can dramatically change the need for those services–in both directions.

Inflation and Interest Rates

Food costs have the potential to create enormous impact on other costs, as well. When food costs shift, inflation and interest rates may shift along with them. Drought and flooding as an effect of climate change could, in the near future, cause food costs to increase substantially. As a result, inflation may increase along with it as other prices rush to reach the same peak. Interest rates may also go up severely.

Estimating Mortgages

The thirty-year mortgage has long been a mainstay of the financial services industry. Buyers expect to be able to get a thirty-year mortgage on their properties, paying off that debt over time. Climate change, however, has immense potential for impact here, as well. As climate changes drastically, it can be more difficult to predict how long a property will remain standing or people will remain in a given area. This could have substantial impact on home prices and values as well as mortgage rates.

Focus on Sustainable Investments

As climate change has a sweeping impact across many industries, it also has the potential for extreme impact on investments in general. Investors are becoming increasingly aware of the necessity of sustainability. Many natural resources are rapidly running out–and public awareness of these challenges has increased. For investors, this means several key things:

Focusing on sustainable investments helps increase profits. Across many industries, inventors and entrepreneurs are focusing on sustainable, environmentally friendly ways to accomplish the same goals. Investors are needed to support these creators–and have the potential to receive immense profits for it.

Ignoring the importance of sustainable investing could decrease overall profits and increase risk. Investors who are still supporting unsustainable fields may not just discover that the return on their investment decreases, but in fact that they’re facing substantially more risk as a whole. Many people and businesses are no longer supporting those industries, which could lead to substantial losses for investors.

Investors are learning the importance of voting with their money. Investors across multiple industries are learning that focusing on sustainable investments can help decrease environmental impact and even decrease the effects of climate change.

New opportunities are opening up in the financial services industry even as doors that have previously spelled prosperity for investors and financial service providers are closing. Now, as never before, investors and providers across the industry must focus on the importance of sustainability and what it means for them, gauging risks carefully to help ensure that they are able to weather the potential storms ahead-both literal and figurative.

If you would like to discuss how we can protect your investments please email Claire directly at FH Manning Financial Services on clm@fhmanning.co.uk or call the office on 01507 527383. Our ‘ environmentally sourced’ coffee is always on !