New research tallies the cost of climate inaction
New analysis from the Oxford Sustainable Finance Group and think-tank 2° Investing Initiative, warns that every year companies delay meaningful climate action could add roughly $150 billion in extra costs to the financial sector.
The study, part of a new initiative called the Climate Stress-Testing and Scenarios Project (CSTS) modelled climate-transition shocks across four high‑risk industries. The team built a novel bottom-up asset-level climate stress testing framework that translates firm level climate-related transition shocks to the shocks affecting the value of financial assets. Using asset-level data, they captured the impact of the climate transition on the profitability of publicly listed companies in four climate-critical sectors. These were power generation, oil and gas, coal production, and the automotive industry.
The researchers found that even an early transition in 2026 is likely to be disorderly and expensive, with the overall cost to the financial sector amounting to US$2.2 trillion[i]. On top of this, for every year the transition is delayed, financial institutions could accrue additional costs of $150 billion annually, due to changes in market and credit risk.
The report authors caution that because the study concentrates on publicly listed companies in four specific sectors, the $150 billion annual penalty should be treated as a lower‑bound estimate. When non-public firms and other parts of the economy are included, the true cost of delay could be far larger.
Postponing action will only accelerate costs
A standout finding is that the additional cost to the financial system does not grow linearly. Instead, each year of delay increases losses at an accelerating rate, amplifying both market and credit risk. That non‑linear escalation raises the prospect that prolonged inaction could push stress from isolated losses into broader financial instability.
“Our research highlights that we have already reached a point where an orderly transition might not even be possible anymore,” said Moritz Baer, lead author and project manager of CSTS, urging policymakers and financial institutions to act quickly.
“While governments and financial institutions are delaying climate action over the allegedly prohibitive costs, this report underscores the bill that awaits us if we don't act now.” added Jakob Thomae, Executive Director at 2° Investing Initiative[ii].
The report also reveals that the burden will not be carried equally across the financial sector, with the greatest cost borne by financial institutions that have the highest portfolio exposure to those firms most at risk from the transition. It means banks, insurers, and asset managers heavily invested in polluting industries will shoulder the greatest share of losses. This, the researchers suggest, underlines the need for bottom-up stress tests with sufficient granularity to distinguish amongst financial institutions with exposure to the worst-performing firms
Dr Ben Caldecott, Director of the Oxford Sustainable Finance Group and the Lombard Odier Associate Professor of Sustainable Finance at the University of Oxford, said that the report shows the potential costs to the financial sector for each year that firms delay their climate action, adding:
“These costs are large and rise quickly with every delay. It demonstrates that policymakers, central banks, and supervisors need to move quickly to accelerate climate action from polluting companies, and that they need to develop supervisory capabilities to track and manage down these costs and the risks they create for individual financial firms and the financial system as a whole”[iii].
References
[ii] Ibid
[iii] Ibid
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