2026 Reports

From Planetary Hazard to Financial Stability: Disentangling Climate Risk and Institutional Responsibility

Sachs, Lisa E.; Fujimoto, Danielle; Harel, Quentin

“Climate risk” is routinely treated as a single problem, along with the assumption that different institutions measuring and responding to it will pull the economy coherently toward planetary safety. In practice, this is not the case. The term conflates three distinct things: the planetary hazard itself, the economic damage it can produce, and the financial losses that may follow.

Transmission across these layers is partial and delayed. Exposure distribution, buffers, and market expectations determine how much physical damage becomes economic loss, and how much economic loss reaches financial balance sheets, so a great deal of the hazard never registers as financial cost within the horizons that govern prudential decisions.

This paper distinguishes among these three types of risk and six distinct policy responses to them: mitigation, resilience, risk sharing, fiscal resilience, exposure management, and financial system stability. It examines a range of public and private institutions whose mandates relate to those responses in distinct ways.

The paper makes the case that this conflation has come at real cost. It has directed resources, time, and political capital toward approaches that cannot deliver what is expected of them. It has created busy work of measuring, disclosing and reporting information that is not decision-useful, distracting from effective approaches to mitigation, the only response that reduces the underlying hazard. It loads institutions with expectations that are misaligned with their mandates and tools, and undermines the tools and focus they do need to manage the risks they actually face. And finally, it obscures mounting trade-offs that are left unmanaged, compounding the underlying problem: more accumulated risk, sharper tensions, and less fiscal space to meet them.

Only mitigation reduces the underlying hazard; the other five responses manage its consequences downstream. Disentangling these categories does not lower ambition. It is a precondition for responding effectively to climate risk: matching each objective to appropriate institutions and tools, and directing effort toward the structural barriers that determine whether the transition can be financed at all.