By Ioannis Ioannou, Associate Professor of Strategy and Entrepreneurship, London Busienss School
Imagine trying to insure your home and being told that no company will cover it. For thousands of families in California, this already feels close. Wildfire seasons have grown so destructive that major insurers such as State Farm and Allstate have stepped back from some of the state’s most exposed areas, leaving households to grapple with sharply higher premiums or to search for scarce alternatives.
What begins as a fire in California, a flood in Pakistan, or a drought in the Panama Canal does not remain local. These shocks collide with the structures of modern economies. When insurers retreat, communities lose protection. When cocoa harvests fail or rice exports are restricted, food prices surge around the world. When heatwaves push power grids to their limits, governments face pressure to borrow and spend. Each example shows how environmental stress and financial systems are bound together, testing the capacity of markets and states to absorb pressure without sliding into wider instability.
Allianz, one of the world’s largest insurers, has warned that climate change could push parts of the economy toward “uninsurability,” a shift with deep implications for both markets and societies. Insurers themselves have begun to describe insurability as a strategic concern rather than a routine one: a June 2025 report by Howden explains how tighter modelling and more restrictive terms now shape whether coverage exists at all. And the financial weight of climate disasters is rising. Swiss Re estimates about USD 80 billion in insured catastrophe losses in the first half of 2025 alone, nearly double the 10-year average, with overall losses far higher—evidence of how local disasters quickly accumulate into system-wide costs.
In an earlier essay titled Markets at a Crossroads, I argued that the critical issue is not whether the transition will happen, but how. An orderly transition unfolds with foresight: steady policy signals, gradual shifts of capital, and enough time for communities to prepare. A disorderly transition, by contrast, begins with a shock—whether a flood, a fire, or an abrupt policy move—and then races through balance sheets, portfolios, and public finances. Climate risk acts as an accelerant, dragging tomorrow’s vulnerabilities into today.
The chain often starts with households and real estate. A disaster raises risk and insurers step back. Premiums climb, coverage thins, and buyers hesitate. Homes sell for less, mortgages look weaker, and banks adjust their lending. Defaults rise in the hardest-hit areas. Securities backed by those mortgages lose value. Investors take losses. Local governments collect less tax just as demands for emergency spending surge. In California’s highest-risk wildfire ZIP codes, private insurers have reduced coverage materially since the mid-2010s, while average homeowners’ premiums rose by more than 50% statewide and by roughly 80% in the very-highest-risk areas. A single step in the chain sets off many more.
From there, the cascade often moves to companies and investors. Policy and technology shifts can reprice entire sectors in a matter of months. A sharp carbon tax, an accelerated phase-out of petrol cars, or a breakthrough that slashes renewable energy costs can turn once-profitable assets into stranded ones. Estimates suggest as much as USD 2.3 trillion in fossil fuel assets could be stranded within the next decade, with the UK alone facing losses of about GBP 141 billion, much of it tied to pension funds. Allianz Research has shown how physical and transition risks combine to accelerate this devaluation, stranding assets long before the end of their lifecycles. Even those leading the clean-energy shift face turbulence: Ørsted, the world’s largest offshore wind developer, wrote down billions in 2024 as higher interest rates and supply-chain delays undercut its projects. Verisk Maplecroft projects that climate risk could triple corporate exposure by 2050, placing more than USD 1.1 trillion of market value at risk on major exchanges. What hits companies then moves quickly into jobs, communities, and portfolios.
The next domino is sovereign finance. A drought cuts farm yields and hydropower. A heatwave pushes electricity grids to the limit. Food and energy prices rise. Central banks raise interest rates to contain inflation, and borrowing becomes more expensive across the economy. Governments, meanwhile, must spend more on recovery and adaptation. Pakistan’s catastrophic 2022 floods illustrate the point: damages and losses exceeded USD 30 billion, with reconstruction needs above USD 16 billion, feeding straight into debt dynamics and drawn-out talks with international lenders. In Europe, the ECB finds that heatwaves reduce agricultural and service-sector output. Some early evidence in Italy suggests that heatwaves are already inflicting economic damage — in agriculture, labour productivity, and public services — raising concerns among investors about climate exposure in public and corporate accounts.
Trade and commodities extend the cascade globally. Drought in the Panama Canal reduced shipping volumes by more than a third in 2024, raising costs and delaying deliveries across supply chains. In West Africa, drought and disease – in combination with illegal gold mining and sector mismanagement – pushed cocoa prices to record highs in 2025, with ripple effects on consumer prices worldwide. India’s restrictions on rice exports in 2023 and 2024 lifted global prices by more than 20% within months, straining budgets in import-dependent countries and illustrating how one government’s response to climate stress – and to protect domestic food security – can transmit inflation across continents.
Each domino tells part of the story. Together they form a chain reaction. A climate shock unsettles insurance, reshaping property values and mortgages. Mortgage stress feeds into banks and capital markets. Corporate assets reprice, sovereigns carry rising costs, and trade disruptions send inflation through supply chains. What begins as weather becomes finance. What begins as finance becomes social stress. This chain is already visible, shaping decisions in boardrooms, on trading floors, and in ministries of finance.
A disorderly transition is precisely this collision of climate and finance. The test for leaders is not whether they recognise the risks, but whether they move before the dominos fall. For executives, that means treating climate as central to value creation and preparing for moments when markets may shift abruptly. For policymakers, it means creating robust signals and institutions strong and legitimate enough to steer capital before crisis does it instead. Ultimately, this comes down to resilience. The cascade shows how fragility multiplies when risks are left to build unchecked, and how resilience grows when hazards are recognised early and addressed with foresight.
Resilience is the capacity to absorb disruption and adapt in ways that leave systems stronger. The same is true inside organisations. When decision-making is narrow and voices are excluded, blind spots widen, and weaknesses emerge only under pressure. When cultures are inclusive, risks surface earlier, adaptation is quicker, and responsibility for change is shared more broadly. Just as unmanaged climate risk creates fragility in economies, exclusion creates fragility in firms. In both cases, resilience depends on leaders treating vulnerabilities as systemic and acting before they harden into crisis.
The disorderly transition is one expression of a wider challenge: how societies, economies, and organisations confront fragility. The same habits that reduce exposure to climate shocks – foresight, inclusivity, decisive action – also prepare institutions and cultures for social shocks. Where leaders act early and engage widely, systems bend under pressure yet hold together. Where they delay, fragility deepens and shocks dictate the terms of change.
Dr Ioannis Ioannou
A leading expert in sustainability leadership and corporate responsibility, Dr Ioannis Ioannou‘s research provides valuable insights into the challenges and opportunities organizations encounter when developing sustainable business models. His award-winning academic work on strategic ESG integration, coupled with his focus on the investment community and financial markets, has established him as a thought leader in the field.