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When an investor funds a venture, they do so with the hopes of earning more than they invested. However, investors risk financial loss if the venture underperforms or fails. This trade-off between risk and return is a fundamental consideration in any investment and leads investors to demand higher possible rewards for higher-risk investments. The presence and management of financial risk is ubiquitous across all sectors of the economy, although what that risk looks like differs by sector and by individual investment.

As climate change warms the planet and actions are taken to reduce emissions, financial institutions must reckon with new and changing risks to assets and the broader financial system. This explainer will discuss the risks that climate change poses to financial systems and stakeholders, as well as actions to accurately account for these risks.