Introduction

The report reviews over 300 academic, policy and institutional sources to assess how delayed, failed or twin-track climate transitions translate into economic and financial risks for the UK and the global financial system. It focuses on transmission channels from physical and transition risks, with particular emphasis on emerging markets and developing economies (EMDEs) as a core driver of systemic risk.

Economic and Financial Impacts of Failed, Delayed or Twin Track Transition

The literature shows strong consensus that climate risks are intensifying across planetary, economic and financial tiers. Physical risks, disorderly policy shifts and technological change can reduce productivity, strand assets, disrupt trade and raise fiscal pressures. These effects interact through feedback loops, tipping points and tail risks that are poorly captured in most models. Long-term scenario estimates of global GDP impacts vary widely, from low single-digit losses to up to 50% GDP destruction by late century under high-warming pathways, highlighting deep uncertainty and model limitations.

Implications for UK and Global Financial Stability to 2100

Economic losses can propagate into financial instability through mispricing of climate risk, interconnected financial networks and cross-border spillovers. Evidence suggests climate risks may be systematically under-priced due to data gaps, incomplete disclosure and modelling weaknesses, increasing the risk of abrupt repricing and liquidity stress. Central bank stress tests generally show manageable impacts, but are criticised for under-representing non-linear damages, insurance withdrawal and compound shocks. Delayed and fragmented transitions consistently result in higher long-term economic and financial losses than early, coordinated action.

Impact of a Delayed or Failed EMDE Transition on Financial Portfolios

Advanced-economy portfolios are exposed to EMDE climate risks through cross-border banking, insurance, sovereign debt, equities and global supply chains. Key transmission pathways include bank balance-sheet rebalancing, reinsurance concentration and commodity and manufacturing linkages. Empirical evidence on the scale of contagion remains limited, but studies indicate that local climate shocks can spread rapidly across global equity and credit markets. Persistent data gaps on direct and indirect EMDE exposures constrain portfolio-level risk assessment and stress testing.

Cascading Geopolitical and Environmental Risks and the IFA

The international financial architecture (IFA) has made progress on climate disclosure, scenario analysis and prudential supervision. However, mandates remain fragmented and tools are largely designed for short-term crises rather than slow-burn, compounding risks. The literature warns against conflating climate financial risk management with driving real-economy transitions. While supervisory measures support stability, they are insufficient on their own to mobilise large-scale capital reallocation without complementary fiscal, development and industrial policies.

Economic Opportunities and Investor Appetite in EMDE Transitions

Scaling investment in EMDE transitions is critical to reducing global systemic risk, given emissions trajectories and cost-of-capital differentials. Structural barriers persist, including weak data, credit-rating practices and prudential rules that inflate perceived risk and deter private capital. Initiatives such as multilateral development bank reform and blended finance help de-risk investment but often overlook these deeper constraints. Evidence on investor appetite is mixed and shaped by mandate limits and risk-return expectations.

EMDE Climate Transitions, Investment Frameworks and the IFA

The review finds that responsibility for directing climate transitions lies primarily with governments, development finance institutions and multilateral bodies, not central banks and supervisors. Suggested actions in the literature include improving EMDE data and transparency, reforming risk assessment and credit-rating approaches, strengthening co-ordination within the IFA, and developing stress-testing frameworks that better capture compound, cross-border and tail risks.

Conclusion

Overall, the evidence indicates that delayed, failed or fragmented climate transitions materially increase long-term economic and financial instability. Early, coordinated global action, combined with targeted reforms to investment frameworks and the international financial architecture, is consistently associated with lower systemic risk and more stable financial outcomes.