A new study suggests that climate risk is beginning to shape where banks decide to lend money, even before natural disasters strike. The research, co-authored by Kristle Romero Cortes, an associate professor at UNSW Sydney Business School and senior deputy director of the UNSW Institute for Climate Risk & Response, found that banks are adjusting their lending practices in anticipation of physical climate risks like storms, floods, and wildfires. These risks are being factored into financial decisions earlier than previously understood, influencing not only who can borrow but also where lending occurs. Traditionally, research on climate change and banking has focused on the financial consequences after a disaster occurs. However, this study took a different approach by using temperature records across the United States to measure systematic physical climate risk—long-term changes in climate that affect multiple regions simultaneously. The researchers found that counties more exposed to these temperature shifts experienced more frequent disasters and greater damage over time. This allowed them to connect physical climate changes with financial risk before actual losses occurred. The study then examined how individual banks were exposed to these climate risks and how they responded. Banks with higher exposure to physical climate risks were found to hold more capital and adjust their lending behavior by reducing loans in areas more vulnerable to climate risks. For a county with average climate exposure, a one-unit increase in a bank’s climate risk measure was linked to about 10% fewer small-business loans and a 5% decrease in the total value of lending. When actual climate shocks occurred, the impact on lending became even more pronounced. While the study did not directly look at insurance costs, the researchers compared lending patterns across different banks in the same U.S. county, helping them isolate the effects of a bank’s own climate risk exposure. This method allowed them to understand how climate risk influences lending decisions independently of local conditions affecting all borrowers. Romero Cortes notes that while it makes sense for banks to avoid areas with high climate risk, these decisions could leave climate-vulnerable communities with less access to the financial resources needed to adapt and grow. Small businesses, which are generally riskier borrowers, may be especially affected if banks decide that lending in climate-exposed areas is too risky for their portfolios. The research is based solely on U.S. data, and Romero Cortes cautions that the findings cannot be directly applied to Australia due to differences in banking systems. The U.S. has a large number of banks operating in a diverse geographic landscape, while Australia has a more concentrated banking sector with four major banks dominating the market. This means that a significant climate risk in one area could affect all major Australian banks at the same time. The study raises important questions about how physical climate risk might influence Australia’s more centralized banking system. Romero Cortes emphasizes that climate considerations are now deeply embedded in many aspects of life, whether or not they are specifically studied.