Between Record-Breaking Heat and Bank Balance Sheets: Is the Financial Sector Prepared for Climate Change?

As CEOs, bankers and their supervisors from across Europe return from their summer holidays, they will have noticed that in 2026 heat record after heat record has been shattered. Much of the continent has been plagued by wildfires. At the same time, climate risk on banks' balance sheets is generally considered to be manageable. What is going on here?

This apparent contradiction sits at the heart of Hesse McKechnie’s session within the Climate Change Finance Executive Education course at the University of Zurich. As lecturer of the session “Managing Climate Change in the Financial Industry”, he explores how financial institutions can better assess and manage climate-related risks.

Over the past years, working directly with financial institutions across Europe on sustainability strategy, climate transition and reporting, I kept encountering the same gap: banks and supervisors have sophisticated risk frameworks, but those frameworks were not built to capture a risk that unfolds over decades and accelerates non-linearly.

That gap between what our tools measure and what is actually happening on the ground is what pulled me deeper into this field. This issue has motivated much of my own research over the past few years. I am excited to discuss these ideas with participants because climate change is rapidly becoming one of the defining strategic challenges for the financial sector and because I believe we are only beginning to understand what effective climate risk management really looks like.

The session is built around a simple but important proposition: climate change is not only an environmental issue, but increasingly a question of economic resilience and financial stability. Banks, investors and their supervisors are being asked to make decisions today that will determine how resilient the financial system remains over the coming decades. 

Yet, the timeframe for which climate risk is calculated typically does not extend beyond 3–5 years. Many of the tools we rely on to assess financial risk are based on backward-looking data and underestimate the impact of tipping points both in technology and in ecosystems.

During the session we will explore how physical risks from floods, heatwaves and other extreme weather events and transition risks arising from policy, technology and changing markets affect financial institutions. We will discuss how these risks flow through to credit risk, asset valuations, business models and ultimately financial stability. But we will also ask a more difficult question: are financial institutions currently managing these risks well enough?

Rather than offering simple answers, I hope to encourage participants to engage with the trade-offs facing today's financial sector:

• How does climate risk manifest itself on bank’s balance sheets?
• Should banks simply reduce exposures to carbon-intensive sectors, or should they actively finance the transition?
• How should supervisors balance financial stability with broader public policy objectives?

These are not abstract academic questions. They are questions that financial institutions are beginning to confront every day.

My hope is that participants will leave not only with a better understanding of the latest regulatory developments and risk management frameworks, but also with new ways of thinking about the role that finance can and should play in the transition to a more resilient economy.

This is not just a matter of "doing the right thing" but also about being cleverer and more long-term in understanding our self-interest.

Those who want to go deeper will find a fitting option in theClimate Change Finance course at the Executive Education of the Faculty of Business, Economics and Informatics, University of Zurich.

Explore more Executive Education programs in Finance here.