Global | Damage Functions: Climate Hazards, Economic Losses, and Banking Risks

Summary

Climate damage functions translate acute and chronic hazards into economic losses, from asset-value damage to GDP impacts. As no single function captures every hazard or transmission channel, banks must carefully calibrate and combine them, avoiding double counting while accounting for uncertainty.

Key points

• Key points:
• Climate damage functions translate physical climate hazards into economic losses. Depending on their specification, they can be used to quantify outcomes ranging from the deterioration in the value of physical assets affected by acute events to aggregate GDP impacts arising from productivity losses associated with chronic climate hazards.
• Granular firm- and location-level data can reveal indirect productivity and allocation losses missed by aggregate models.
• For banks, climate damages affect credit risk mainly through borrower default capacity, collateral values and recoveries.
• Banks should combine top-down and bottom-up approaches carefully, avoid double counting and report ranges reflecting uncertainty and adaptation.

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