Physical Risk

4 Key Areas to Know About Climate Change

Although climate change is a widely recognized issue, it’s easy to misunderstand what it really is, what causes it, and what it means for financial institutions.

Thursday, May 18, 2023

By Tom Strachan


Climate change is one of the most widely discussed issues in the world today. Even so, it’s easy to misunderstand what it really is, what causes it, and how it relates to financial institutions. This article explains the core mechanisms of climate change, showing how they fit together and leaving you with a better understanding of this critical issue.

1. Atmosphere, Weather and Climate

Starting with the most basic concepts, the atmosphere is the layer of gases surrounding our planet where weather and climate processes occur.

Weather is simply the current state of the atmosphere at a specific place and time; it therefore changes from moment to moment. Weather can be described in terms of temperature, wind, moisture, precipitation and/or pressure.

In contrast, climate is the average state of the atmosphere at a specific place over a period of many years, often decades. In other words, climate refers to the patterns of weather in a place over a longer period of time.

It’s important to understand the difference between weather and climate. Imagine rolling a six-sided die. A day’s weather is like the result of a single roll of the die, while climate can be thought of as the statistics compiled from many rolls.

The study of weather is known as meteorology, and the study of climate is known as climatology. Though both disciplines seek to understand how the atmosphere works, meteorologists are concerned with short-term atmospheric processes (i.e., the weather), whereas climatologists are concerned with long-term atmospheric processes (i.e., the climate).

2. Greenhouse Gases and the Greenhouse Effect

Greenhouse gases (GHGs) are gases that are able to trap Earth’s heat within the atmosphere. Common GHGs include carbon dioxide (CO2), nitrous oxide (N2O), methane (CH4), water vapour (H2O) and fluorinated gases.

Human activities such as the burning of fossil fuels, agriculture and waste disposal, as well as natural processes such as respiration, decomposition and volcanic activity release GHGs into the atmosphere. The chemical structures of GHGs cause them to absorb and re-emit Earth’s heat when present in the atmosphere (other atmospheric gases like nitrogen and oxygen do not do this). This process is referred to as the greenhouse effect.

As many types of GHGs are naturally occurring in the atmosphere in low levels, the greenhouse effect has always played a role in determining Earth’s temperature. However, the huge volume of GHGs being released into the atmosphere from human activities is dangerously intensifying the greenhouse effect.

According to Our World in Data, approximately 37 billion tons of GHGs were released into the atmosphere from the burning of fossil fuels alone. This represents an increase of over 180,000% when compared to levels from the year 1850. Both Earth’s rising average temperature and its consequences for weather and climate are directly attributable to the greenhouse effect.

3. Global Warming and Climate Change

Global warming refers specifically to the net warming of Earth’s surface due to the anthropogenic greenhouse effect. The total anthropogenic global surface temperature increase since 1850 is currently estimated at 1.07oC according to the Intergovernmental Panel on Climate Change (IPCC).

Meanwhile, climate change refers to how Earth’s climate is being changed by this net warming and how those changes are observable in altered climate and weather patterns.

Although these terms are often used interchangeably in practice, they do refer to different sets of phenomena, so it’s helpful to keep in mind the cause-effect relationship between them. GHG emissions from human activities enhance the greenhouse effect, which causes global warming, which then causes climate change.

This distinction is especially important when talking about their impacts, which have been researched extensively by the IPCC. For example, as a direct result of global warming, the IPCC found that sea levels are now rising almost three times as fast compared to 50 years ago due to the thermal expansion of the world’s oceans and the accelerated melting of glaciers and icesheets.

Similarly, the IPCC suggests that anthropogenic global warming is very likely the cause of the observed decrease in the number of cold days and the observed increase in warm days and nights globally, due to changes in Earth’s climatological systems (i.e. climate change).

Furthermore, these climatological changes have resulted in an observable increase in the frequency and severity of extreme weather events, such as hurricanes, floods, heatwaves, and droughts.

4. What Does This Mean for Financial Institutions?

The negative consequences of global warming and climate change stem from — but go far beyond — their physical impacts. Given that we need to decarbonize in order to minimize global warming and climate change, we must also consider the risks arising from the transition to net-zero GHG emissions.

To learn more about the risks and opportunities from climate change in the financial sector, read our white paper Climate Risk Management at Financial Firms: Challenges and Opportunities. GARP Risk Institute (GRI) also maintains a glossary with clear definitions for essential climate and sustainability-related concepts, which may be useful if you’re just getting started in this space.

If you’re interested in becoming a climate leader within your own organization, consider signing up for the Sustainability & Climate Risk (SCR®) Certificate.


Tom Strachan is a climate risk and sustainable finance analyst at the GARP Risk Institute.

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