Structuring decision-making for systemic climate-financial risk.

Abstract Physical climate risks are a source of vulnerability in financial systems, yet existing risk measurement approaches struggle to translate them into decision-relevant metrics, reflecting a mismatch between how climate risk evolves and how financial risk is assessed. Drawing on workshops and interviews with 35 finance and risk professionals (33 from a large financial institution, two from a global insurance broker), we identify six interacting risk domains through which physical climate risk cascades to credit loss, creating decision bottlenecks where routine practice breaks down. Integrating storylines and dynamic adaptive policy pathways, we develop a qualitative–analytical framework that allows decisions to proceed within these bottlenecks. Whereas scenario analysis and stress testing estimate losses under specified futures, the storylines developed here trace how risk reaches the portfolio through the responses of insurers, households and regulators and the institution itself. The pathways identify which signals to monitor and when to reconsider action, organising risk appetite as sequences of contingent actions. Because its effects lack historical precedent and a robust link to default, emerge gradually and often unseen across interacting domains, and rebound on the institution through the responses its own actions provoke, climate-financial risk is as much a problem of decision structuring and adaptive governance as of measurement.