Climate risk is often presented as a new risk that businesses and financial institutions must learn to manage. In reality, many of its financial consequences are not new at all.
Businesses have always had to account for where they build, how much it costs to protect an asset from flooding, whether a road remains accessible during heavy rainfall, how much insurance will cost, or whether a piece of land will retain its value. What has changed is the scale of the underlying climate pressures, the availability of data and modelling, and the growing expectation that these risks should be identified, quantified and incorporated into formal business decisions.
When heavy rains caused widespread flooding across parts of West Africa this year, the immediate images were familiar: submerged roads, flooded homes, stranded commuters and damaged property.
In Ghana, the June 2026 floods affected 38,802 people in Greater Accra and displaced 7,761 households, disrupting homes, businesses, transport and essential services. Similar episodes of severe rainfall and flooding affected parts of the Gulf of Guinea, including Nigeria. These events are often discussed as humanitarian or environmental disasters. But there is another question that businesses and financial institutions increasingly need to ask:
What happens to the financial value of an asset when the environment around it becomes more exposed to climate risk?
A flood does not have to be called a “climate risk” before it becomes a financial problem. Damage can disrupt operations, increase costs, reduce income and affect the value of an asset used as collateral.
Consider a flood-prone property in Lagos. A 2025 study of Victoria Island found that properties in flood-prone areas could experience depreciation of up to 10% compared with safer locations.
The point is not the 10% figure itself. It is that physical exposure can influence financial value.
For investors and lenders, the question is therefore no longer simply, “Does this property flood?” but “What could that exposure mean for its value and cash flows?”
This distinction matters because climate risk rarely sits in isolation.
A flood may begin as physical damage, but its consequences can move through several parts of the financial system. A business may face operational disruption, lower revenues and higher repair costs. An insurer may face larger claims. A lender may face increased credit risk if the borrower’s cash flow weakens. If the damaged property is collateral, its value and the lender’s recovery position may also come under pressure.
One physical event can therefore affect several traditional financial-risk channels.
This is why climate risk is increasingly being understood not simply as a new category of risk, but as a risk driver that can influence existing risks such as credit, operational, market and liquidity risk.
Beyond Flooding
Flooding is only one example of physical climate risk. Extreme heat can increase energy costs, drought can disrupt agriculture and power generation, while coastal erosion can affect infrastructure and property values.
The financial impact depends on the asset, location, sector and ability to adapt. This makes good climate data increasingly important. Knowing that an asset is exposed is useful; understanding how that exposure could affect costs, cash flows and value is what matters for decision-making.
But climate risk is not only physical. Transition risk can also affect businesses as regulation, technology, consumer preferences and capital shift towards a lower-carbon economy. For carbon-intensive businesses, this could mean higher operating costs, additional investment or weaker demand.
In both cases, the question is the same:
How could climate-related change affect financial performance and value?
Africa's Financial System Is Beginning to Respond
Across the continent, regulators are increasingly expecting financial institutions to consider climate-related risks within existing governance and risk-management frameworks.
Kenya introduced climate-related risk-management guidance for banks in 2021. Ghana has established a Climate-Related Financial Risk Directive, while South Africa's Prudential Authority has issued guidance covering the integration of physical and transition risks into financial-risk management.
Nigeria is also moving through the implementation of IFRS S1 and S2, with the Financial Reporting Council's 2026 roadmap providing for phased adoption and mandatory application for public-interest entities from 2028.
The broader message is consistent: climate risk is not necessarily a separate risk sitting alongside credit, market or operational risk. It can be a risk driver that affects those existing categories. The Basel Committee similarly recognises that climate-related risk drivers can translate into traditional financial risks and encourages institutions to assess their financial materiality.
| Climate driver | Immediate effect | Financial risk channel |
|---|---|---|
| Flooding | Asset damage and business interruption | Operational / Credit / Insurance |
| Extreme heat | Higher cooling costs and lower productivity | Operational |
| Drought | Lower output and input shortages | Credit / Market / Operational |
| Coastal erosion | Land and infrastructure exposure | Asset / Operational / Credit |
| Transition regulation | Higher production costs | Strategic / Credit |
| Carbon pricing | Higher operating expenditure | Market / Strategic / Credit |
| Asset impairment | Lower recoverable value | Credit / Financial |
| Supply-chain disruption | Delays and higher input costs | Operational / Credit |
| Extreme weather | Reduced borrower cash flow | Credit |
| Infrastructure failure | Access and business interruption | Operational / Strategic |
The table is simple, but the assessment behind it does not have to be.
For a financial institution, understanding these connections may require looking beyond the immediate exposure to what happens next.
If a borrower operates from a flood-prone location, for example, the assessment may need to consider the resilience of the property, insurance coverage, business continuity arrangements, expected repair costs and the potential effect on cash flows.
For an investor, the same analysis may influence assumptions about asset values, operating costs, expected returns and the long-term viability of an investment.
This is where scenario analysis and climate stress testing become useful. They allow organisations to ask not only what is happening today, but what could happen under different physical and transition scenarios.
Ultimately, the questions are financial:
- Will cash flows change?
- Will an asset retain its value?
- Will a borrower remain able to repay?
- Will the cost of capital change?
- Will the business remain viable under different scenarios?
These are not simply sustainability questions. They are questions about value, risk and financial resilience.
The challenge for businesses and financial institutions is therefore not only to identify where climate risks exist, but to understand how those risks could affect financial outcomes and incorporate that understanding into decisions.
Climate risk is becoming less about a distant environmental scenario and more about recognising the factors that can already shape the value, resilience and performance of businesses and assets.