A discrepancy exists between the relatively low climate risk reported by Britain's largest banks within their loan portfolios and the significantly higher risk perceived by investors and the public, according to Lisa Sachs, Director of the Columbia Center on Sustainable Investment. Sachs argues that while this gap is real, the banks’ risk assessments are generally accurate and reflect a fundamental misunderstanding about how climate risk should be addressed by financial institutions.

Banks are exposed to climate-related risks, and some may struggle to manage them effectively. However, even a precise risk evaluation by banks will typically show lower exposure compared to the broad and substantial risks faced by the planet, the economy, and populations. For example, an extreme heatwave might cause widespread human suffering and economic disruption in a city without necessarily translating into significant credit losses on a bank’s loan book. Collateral may remain intact, and borrower defaults may be limited, resulting in a mismatch between societal impacts and what appears in financial risk models.

This disparity stems from differing objectives in the climate risk debate. Financial regulators aim for banks to recognize and disclose climate risk to safeguard the banking system and support economic stability. In contrast, climate advocates expect that increased transparency will motivate banks to reduce financing for high-emission industries, thereby contributing directly to carbon reduction. Sachs suggests that the opposite outcome is more likely. Banks’ climate risks are driven primarily by their exposure to vulnerable assets—properties and businesses in areas susceptible to floods, fires, or drought—rather than by investments in the emitters of greenhouse gases. Consequently, improved risk pricing may restrict financing to already at-risk communities without necessarily curtailing emissions.

Sachs acknowledges the urgency of global decarbonization but emphasizes that banks’ lending patterns reflect prevailing economic demands for energy, including fossil fuels. Financing tends to follow demand rather than create it, and limiting bank credit alone will not directly reduce greenhouse gas emissions. Instead, addressing climate hazards requires shifting energy consumption patterns, a goal that falls outside the scope and authority of financial regulation.

The broader risk posed by climate change will largely remain invisible to bank models until critical buffers fail, highlighting the limitations of current risk measurement tools. According to Sachs, financial regulation should focus on managing the downstream consequences of climate change rather than attempting to mitigate the root causes. She concludes that the most important work lies in overcoming the obstacles that prevent clean energy from becoming the more affordable and financeable option, thereby enabling the transition to a low-carbon economy.