Will climate cause the next financial crisis?

On the plus side….

Upgrading private rented stock may seem daunting for landlords, with costs potentially reaching £21.6 billion and more onerous requirements adding complexity to the day-to-day of being a landlord. However, the long-term benefits of more efficient housing stock for tenants and the broader economy could be substantial. The £13.2 billion Warm Homes Plan, confirmed in the Spending Review, aims to cut energy bills by an average of £220 a year for three million households. According to think-tank E3G, this could boost GDP by 0.08%. A more ambitious policy, aligned with Climate Change Committee recommendations, could more than double these benefits, delivering a 0.17% GDP boost over 20 years, outpacing the Elizabeth Line’s growth over a longer period.

The plan would also create 9,000 skilled jobs annually, while lower bills would free up discretionary income, stimulating further economic activity. E3G also highlights £8.7 billion in health and wellbeing gains, reducing NHS demand and supporting a fairer society. Similarly, the World Resource Institute  found that every $1 invested in adaptation yields $10.50 in benefits using the 'Triple Dividend of Resilience' approach: avoiding losses; generating economic benefits; and delivering environmental and social gains. 

ESG’s role in financial performance was a major LCAW theme. In a survey by Buro Happold and FT Longitude, 79% of 400 businesses reported a positive financial impact from ESG, with 40% of those citing gains of 11% or more. Improved resource management, lower energy costs, material reuse, and project de-risking are now seen as pragmatic sustainability and ESG leaders (those seeing greatest positive impact in the survey) increasingly view these efforts as catalysts for innovation and growth.

Detracting from growth…

However, resilience has a flip side - vulnerability. Disaster recovery and climate-related costs are already constraining economic growth, mainly through rising insurance premiums. A Bloomberg Intelligence report highlights that in the US, nearly $1 trillion, or about 3% of GDP, was spent on such activities in the 12 months to May 1, 2025.

The report’s authors call insurance “a hidden burden of the climate economy.” US insurers raised premiums by up to 22% in 2023, with another 6% increase expected this year. Premiums have doubled since 2017. The Federal Insurance Office reported in January that premiums in the riskiest areas have been, on average, 82% higher than in the least risky. Importantly, these rising costs are not fully captured in inflation figures, meaning total housing spend is increasing faster than official data suggests. This diverts money from other goods and services, creating a negative multiplier. Additionally, government spending on disaster recovery reduces funds available for infrastructure, further dampening growth prospects. This phenomenon, while acute in the US, is replicated globally due to the frequency and intensity of weather and due to the global nature of insurance.

Owners and occupiers must shift from reactive to proactive strategies to ensure building resilience and limit value impacts. The UKGBC Climate Resilience Roadmap and its launch event emphasised this point. Our ESG Property Investor Survey highlights this, with 34% of respondents reporting increased operational expenditure (OpEx) due to rising insurance and energy costs linked to more frequent and intense weather events. About a quarter also noted higher capital expenditure (CapEx) for the same reasons. Recognising these trends is critical for real estate investors, as both OpEx and CapEx can directly affect valuations.

Systemic risk?

With insurance costs firmly on the radar, the Financial Times published an article ‘How the next financial crisis starts’ highlighting systemic risks from climate shocks in property markets. The core issue is insurance cost and availability.  Without insurance, many cannot secure financing and, if disaster strikes, losses fall on owners or financers which is a risk many are unwilling to take. This, in turn, affects property values. Executives are aware of this broader risk with 68% of those surveyed by Buro Happold and FT Longitude stating that climate risk and the related insurability and cost of insurance will be a rising concern for their business over the next three years.

This is especially relevant given recent research by Dr. James Culley (Knight Frank Analytics), Dr. Mark Andrew, Dr. Nicole Lux and Alex Skouralis, who examined how physical climate risks are reshaping the UK home insurance market and, by extension, mortgage lending and property values. Flooding stands out as both an acute and chronic risk with the greatest potential for systemic impact. Previous research by some of the same authors found that flood-exposed properties sell at an average discount of 8.1%, with high-risk homes facing discounts over 30%. However, “anchoring effects” may cause these value impacts to fade over time: inland flood discounts often disappear after five years, while coastal effects dissipate within four. This makes physical risks difficult to value and price.

While most studies focus on homes, the implications extend to the non-domestic sector. The real risk, as the FT notes, is that this is not a cyclical issue but a persistent one, moving in only one direction. Even without a single trigger event, the risk is ever-present. For new buildings, location will face greater scrutiny for climate risk, but with 80% of 2050’s buildings already standing, resilience must be improved at both asset and area levels for those in existence. The UN recently published guidance on underwriting the transition.

The UKGBC recommends several measures, including:

-    Nature-based solutions: Sustainable urban drainage systems (SuDS), rain gardens, trees, and green roofs to reduce flooding, overheating and support biodiversity.
-    Material choices: Water-resistant concrete, flood-repairable materials, flood doors, and windows, reduced glazing and solar control glass
-    Passive design: External shading and increased ventilation.
-    Water efficiency: Greywater recycling, rainwater harvesting, water-efficient fixtures, and water-retentive landscaping.

There are numerous more actions and considerations by RIBA stage, offering practical guidance for implementation.
 
Despite the challenges, these trends also present opportunities: to avoid negative consequences; improve financial performance; and drive innovation. As discussed last week, the shift to cleaner, greener practices can be a growth engine, potentially accelerated by AI.

AI’s role in all this?

AI’s impact on net zero, energy systems, and buildings is generating both excitement and concern, balancing efficiency gains against high energy use. A recent report suggests that AI-enabled reductions could outweigh costs, leading to a fall in global greenhouse gas emissions by up to 5.4 billion tonnes by 2035. Like many LCAW discussions, the report frames the net-zero transition as an opportunity for innovation and sustainable, resilient, and inclusive growth, and AI can help accelerate this. 

The UK’s Modern Industrial Strategy hints at this, with the Clean Flexibility Roadmap calling for AI integration. AI can “greatly improve” grid management and increase the load factor of solar and wind farms by up to 20%. More flexible energy systems in buildings, optimised by AI-driven tools based on weather and user preferences, will further enhance efficiency.

Other use cases include optimising interconnected urban systems, improving planning, design, and construction of infrastructure, smart grids, green buildings, and resilient transport. As government data becomes more available, highlighted in the strategy, these capabilities will only grow. 

Finally, AI’s role in insurance and risk is crucial. Machine learning can improve weather prediction and risk modelling, enhancing resilience and adaptation, and enabling more granular, transparent risk pricing and asset planning. This shift from macro to micro risk assessment will influence real estate valuations and support proactive rather than just reactive strategies.

What else I am reading

Andrew Shirley highlights the resilience necessity and impact on farmers, the UK Solar Roadmap which includes potential for car parks as we examined in 2023 and The Onshore Wind Strategy.