Lisa Sachs’ letter (“Regulation can’t change banks’ outlook on climate”) offers an alluring case for banks and their regulators to be let off the hook for anticipating and acting to mitigate climate hazards and transition risks that are building in banks’ loan books. Instead, she argues, regulators should train their sights on removing obstacles to clean energy becoming the cheaper and more financeable choice.
Sachs is right that government policies need to promote lower-carbon energy. But it would be unwise to ignore banks’ mispricing of climate risks. Real economic costs from climate change must be accounted for to protect long-term capital; this matters to ensuring sustainable economic growth and long-term returns for investors.
While Sachs agrees that climate risk is 'enormous' and that bank models aren't fit for purpose (“almost none of it will surface in a bank’s models until far too late, once the buffers that absorb it have failed), she argues that regulators should focus on picking up the pieces once climate hazards arrive (“Financial regulation’s job is to manage the downstream effects of climate change, not to reduce the underlying hazard”).
A key assumption underpinning Sachs’ view is that while the economic and human cost from climate change is expected to be vast, banks are unlikely to experience material credit loss. This seems both unlikely and imprudent, missing key economic transmission mechanisms through which climate risks impact banks’ balance sheets. Alongside the direct consequences of climate hazards and economic transition for credit risks, banks are acutely exposed to indirect impacts of climate-related risks for economic growth.
There is a growing consensus of potentially severe economic and financial losses associated with global warming, as underlined by the Financial Stability Board, European Central Bank, International Monetary Fund and leading academics, such as the EDHEC Climate Institute. To take one recent example, wildfires in California in 2025 are estimated to have cost $95–164bn, causing a 0.48% decline in county-level GDP. The fact that California's Governor Newsom’s signing of AB 238 - requiring mortgage lenders to provide forbearance to borrowers experiencing wildfire-related hardship – makes the link to bank loan performance explicit.
Technological advances are meanwhile transforming the economics of low-carbon options, faster than many appreciate. In the US, despite policy headwinds, renewables and battery storage accounted for 95% of net power capacity additions in the twelve months to March 2026. Globally, wind and solar generated more power than gas for the first time in April 2026. EV pick up is accelerating as battery technology neutralises range anxiety and insulates motorists from high and volatile petrol prices. Over a quarter of cars sold in 2025 globally were electric, with the fastest increase is Asia. Banks’ exposure to carbon-intensive sectors needs to be assessed in the context of these structural shifts.
Banks are already required under accounting rules to take a forward-looking approach to expected credit loss modelling precisely to ensure they anticipate economic risks, rather than ignore them. Equally, prudential regulation is intended to anticipate risks to ensure the safety and soundness of the system. This applies to any emerging risk, whether related to private credit, cyber or climate.
It is noteworthy that Sachs frames her letter as responding to ‘climate advocates’. In fact, the letter she references was penned by a group of asset managers and pension schemes focused on preserving long-term capital.
Sachs’ arguments that we need to take climate risks seriously are well made. When it comes to banks, this means that expected climate and transition risks need to be properly priced to ensure the market allocates capital efficiently. Banks and prudential regulators’ failure to pre-emptively identify and act on risks building in banks’ balance sheets was dramatically exposed in the 2007/8 financial crisis. We should not make the same mistake again.
Signatories:
Natasha Landell-Mills, Partner, Sarasin & Partners LLP
Cllr Doug McMurdo, Chair, Local Authority Pension Fund Forum
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