Climate risk mispricing under spotlight at London Climate Action Week

With London Climate Action Week underway, soaring temperatures across the city have set the tone of conversations. To investors, policymakers and scientists convening around town, record high heat levels are serving as a stark reminder of physical climate risks.

LCAW 2026 events have thus far highlighted concerns with physical risk which speak not only to urgency but also financially material mispricing.

NZI Transition and Climate Investment Conference | 22 October | London | Register here

The scientific perspective 

When the world’s leading scientific body on climate change – the IPCC – publishes more reports this year, the word adaptation will reportedly appear with about three times the frequency. Jim Skea, the IPCC chair, stressed this would be the case at an event earlier this month.

Skea addressed the UNEP FI roundtable at LCAW 2026. Overshoot territory, as one panellist framed it, seemed very much in sight.

“It is almost inevitable that we will exceed 1.5° of warming within the next few years”, he told the audience.

The IPCC chair’s commentary also noted that 1.5° delayed is not necessarily 1.5° denied. Skea cited UNEP analysis based on IPCC methodologies that shows 2.8° warming by the end of this century, under current policies. “The very best scenario now is if all the net zero targets are implemented emissions might peak at about 1.8° or 1.9° during the 21^st century”.

“It is possible to bring warming down to 1.5° levels by the end, if we deploy carbon removal technologies”, he explained. In principle, he cautioned, this was possible although significant uncertainties remain.

Simultaneously, Skea highlighted the contribution of clean energy technologies to scientists’ views on emissions. “Given falling costs of wind and solar, higher ranges of emissions are simply implausible now”, he noted.

Mispriced risk

Following Skea’s remarks, a panel of bankers and insurers reflected on the effects of climate risks on their outlooks.

Gunther Thallinger, board member at Allianz offered a view on the insurance industry and the protection gaps that have dominated recent discussions. “The protection gap is growing because the risks are growing faster than the insurance market”, he said.

Thallinger called for a much wider, more systemic shift in the way investors and insurers deal with these risks.

“The decision making we are doing is happening in a solution space that is much too narrow. The time dimension, much too short. The scale dimension, much too small and the valuation dimension in many cases mispriced”, he added.

The consequence, Thallinger warned, was a consistent underestimation of risk. However, like Skea, Thallinger too brought a tinge of optimism to his outlook.

“It has become so clear that climate action is a defining element of competitiveness”, he said while explaining how insurers are working on both adaptation and mitigation financing.

Sabine Mauderer, first deputy governor of Germany’s central bank highlighted another contributor – a slowdown in climate policies. Mauderer went on to cite examples of physical risk and financial protection gaps from a range of countries including her home country.

“Advanced economies can cover single events but if this becomes more frequent at times of extremely high state debt, there is no money to cover things not covered by insurance”, the NGFS chair highlighted.

Sovereign physical risk

Halfway across town, at a parallel event hosted by EDHEC Climate Institute, similar questions were being raised. EDHEC’s experts took aim at a ‘pricing blind spot’ in sovereign markets.

“Climate risks remain partially priced”, said EDHEC Climate Institute’s director Camille Angué in her opening remarks.

Scientific Climate Ratings – a venture by EDHEC – released new data yesterday highlighting sovereign physical risk exposure across 2035 and 2050. The US for instance, is estimated to face climate risk losses of 4.6% GDP per capita loss by 2035 and 10.4% loss in 2050.

SCR chief executive Rémy Estran-Fraioli says these new tools offer a missing link between warming and losses.

“Climate change is a global phenomenon, but climate risk is local and financial. Our framework captures the structural, compounding output losses caused by chronic warming at the regional level and aggregates them into sovereign-level impacts,” he explained, “It provides the missing transmission channel between climate warming and sovereign fundamentals, identifying structural exposure before spreads fully adjust”.

Researchers associated with the dataset noted its capacity to act as an early signal – mapping sovereign exposure before market spreads price them in.

LCAW 2026 has thus far put the spotlight on why, how and to what degree climate risks are being mispriced by financial markets. Across different pools of institutional capital, a consensus that underestimated risks and mispriced valuations need redressal seemed reflective of the realities of physical risk on display in London.

Longview Networks: Institutional Investment Conferences and Summits