From the Intern Desk: Climate Risk

In this special intern-led episode of the IBKR Podcast, our 2025 intern class sits down with Michael Penn of ASR Research to explore the growing financial implications of climate change. From tipping points and inflation to market pricing and central bank policy, the next generation tackles the biggest risks shaping tomorrow’s markets.

Summary – IBKR Podcasts Ep. 283

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Hadi Khamsi 

Hello everyone, and welcome to the IBKR Podcast. In this special episode, the 2025 intern class will be leading the discussion for a thoughtful conversation on climate risk and financial markets. We’re pleased to welcome Michael Penn of ASR Research, who will be a returning guest to the IBKR Podcast. So without further ado, I’ll pass it off to Rishin and Kwame to kick off our questions. 

Rishin Mitra 

Good morning, Michael. I’m Rishin, I’m with the securities lending team. To start off, how would you say climate-related tipping points, like rising sea levels or extreme weather conditions, alter the risk calculations for large exchanges and different kinds of market participants? 

Michael Penn 

Sure, yeah. Thanks, Rishin, and thanks for having me back on the podcast. In regards to climate tipping points, I guess it’s worth understanding first what a climate tipping point is. A climate tipping point is a critical climate threshold beyond which environmental systems undergo some kind of irreversible damage. 

It’s a change in the environmental system that’s irreversible, and those changes tend to be self-reinforcing. Some of the best examples of this include the ice sheets of Greenland or Antarctica—if those collapse, that will create a surge in sea levels. Another common tipping point people focus on is the potential dieback of the Amazon rainforest. If the Amazon rainforest were to die back, we could lose a very valuable global carbon sink, releasing even more carbon emissions into the atmosphere, which would then accelerate climate change. 

That’s a big risk for economies and markets. Some recent analysis—this was in 2024—said that about $58 trillion of global GDP is somehow dependent on nature and nature’s services. You should be thinking about things like fresh water, pollination, timber, fisheries, and so on. That’s more than half of all global economic output. So hitting some kind of climate tipping point would certainly have a very big impact on the global economy and on markets. 

Kwame Boateng 

Hey, Mike. I’m another intern, Kwame, with the sales team. Continuing that thread, what is the tipping point for average global temperature—thresholds beyond which the damage becomes non-linear and affects billions of people, biodiversity, and weather volatility? 

Michael Penn 

Yeah, thanks, Kwame. It’s a good question. The scientific consensus would say that if global temperatures move above 1.5 degrees Celsius above the pre-industrial level, then we could start to hit some of those tipping points you referred to, and damage to the environment could accelerate. 

Just a little background on what 1.5 Celsius means: a rise to 1.5 degrees Celsius above pre-industrial levels means that the Earth’s average surface temperature is 1.5 degrees Celsius warmer than it was prior to the Industrial Revolution, around 1850. That’s equivalent to about 2.7 degrees Fahrenheit warmer. 

The worry here is that we are very close to hitting that 1.5 number. In fact, last year the global average temperature was 1.6 degrees Celsius. That might end up being temporary—just a temporary move above one and a half degrees—but there’s a lot of concern that temperatures are accelerating much more quickly than scientists had expected. So, in answer to your question, 1.5 is the number that everyone is very focused on. 

Rishin Mitra 

Thanks, Michael. Going off on a bit of a tangent, I was wondering: how would you say climate risk contributes to persistent inflationary pressure over the next decade? What might that look like for the next 10 years or so? 

Michael Penn 

Sure. There are a couple of primary ways through which climate change can impact inflation pressure. One is via food, and the other is via supply chains. 

For food, there’s an obvious link: more droughts and floods can wipe out harvests, causing the supply of agricultural products to fall. If supply suddenly drops, prices spike. If those events occur with increasing frequency, the increased prices can become more sustained, leading to inflation. 

The other link, which people often don’t think about as much, is the impact on supply chains. The best recent example is what happened with the Panama Canal. At the end of 2023, the lake that feeds the Panama Canal fell to a 60-year low due to a prolonged drought in Panama. Because the canal level was lower, it restricted the size and volume of ships that could travel through. 

The Panama Canal plays an important role not just in global trade, but particularly in shipping agricultural food. So climate change impacts not just agriculture directly but also shipping and transport, which can push up prices as well. 

Kwame Boateng 

Thanks, Michael. I know you’ve touched on the economic impacts of climate change, but I’d love to hear more about how you think about the size of the economic consequences of climate inaction for consumers, governments, and economies. 

Michael Penn 

Inaction is a good question. The starting point is: if we assume we do nothing and global temperatures continue to rise, what does the world look like 20–25 years from now? 

There’s a lot of economic and scientific modeling projecting these scenarios out to 2100. Under more severe scenarios—where we really don’t do anything—the impact of physical climate change could be significant. Even aside from the tipping points we discussed, under a “business as usual” scenario, we could be talking about losing maybe 20% of annual economic output by 2050. 

The best way to prevent some of the worst consequences is to bring down greenhouse gas emissions today. That means changing how we consume energy—shifting from fossil fuels to clean sources. It means changing how we think about pollution. It probably means paying more to fly, drive, travel, and paying more if we choose to burn fossil fuels rather than opting for clean energy. 

The fundamental problem with inaction is that changing how we live today costs money. To reduce the costs of physical climate change in the future means paying an upfront cost now. That requires being very forward-looking and altruistic toward future generations—willing to take the cost today to minimize the long-term cost. 

The problem is that with current issues like the cost of living, increased military spending, and healthcare costs, it’s hard to get people to prioritize something that feels like the worst consequences are far away. That’s where governments must play a much greater role—intervening, changing the shape of the burden, and making people much more aware that the consequences are coming down the road. 

Hadi Khamsi 

So, we’ve discussed the broad economic impacts of climate inaction. Let’s focus on how specific financial institutions are responding to these challenges. Michael, how might central banks incorporate climate-related risk into their monetary policy decisions? 

Michael Penn 

For central banks, I think they face quite a tricky balancing act. We’ve already talked about some of the physical impacts of climate change, and that’s going to create inflationary pressures. Central banks are focused on shocks that come from food supply or supply chains, and those will tend over the long run to push inflation up. 

On the other hand, these climate shocks—like floods or droughts—are likely to depress economic activity, meaning lower economic growth. So the question for a central bank is: what do I do when inflation risks are building and rising because of climate change, but growth rates are being pushed down? What do you do when you have higher inflation and lower growth? Do you raise interest rates, or do you cut interest rates? 

That’s a challenge many central banks are grappling with, probably more in emerging markets right now than in developed markets. One new idea being floated is something called adaptive inflation targeting. In plain English, adaptive inflation targeting means central banks would add tolerance bands—allowing inflation to fluctuate between, say, 1% and 3%—rather than being fixated on a strict 2% target. 

If they moved toward these kinds of new concepts, it might give central banks a bit more breathing room to cope with unexpected shocks, like disruptions to food supply or weaker growth. These are some of the ideas central banks and monetary policymakers are considering as climate risks start to build. 

Tyler Knohl 

Hi Michael. My name is Tyler, and I’m an intern from the Institutional Services team. My question for you today is: do you think the market is correctly pricing in the shift from fossil fuels to renewable energy in their risk models? 

Michael Penn 

Thanks, Tyler. It’s an interesting question. What does the academic evidence say about companies and the energy transition? Are companies that pollute more or rely on fossil fuels trading differently from cleaner companies? You could extend that question to sovereign debt markets: does the sovereign debt of a country like Saudi Arabia—very reliant on oil revenues and potentially at risk if we see a faster transition away from oil—trade differently from the debt of a country that has already started to shift to clean energy? 

The evidence here is quite mixed. There’s no clear sign that cleaner companies trade differently from dirtier companies—or the same for governments. That’s because it’s not really clear yet how quickly the energy transition will take place. If the market were confident in a very quick and orderly energy transition, yes, some of those companies or countries might suffer. But governments have been sending very mixed signals. 

A couple of years ago, we had the Inflation Reduction Act, which suggested America was on a clear path to decarbonize, and then there was political pushback from that. We’ve seen similar pressures in Europe, where governments have stepped away from some of their stronger climate commitments. Because governments are sending mixed messages, markets are not necessarily betting on a faster energy transition. 

So it’s not really clear that there’s a difference in the way markets price “clean” companies versus “dirty” ones. However, one area where the academic evidence is clear is on how markets view physical climate risks—things like floods, droughts, or wildfires. Companies or countries facing higher physical climate risks do tend to see market prices reflect that. 

In sovereign debt, for example, if you’re an emerging market or developing country in the firing line of the worst physical climate impacts, your bond prices reflect that increased risk. So, on the physical side—yes, markets price it in. On the energy transition side—the evidence is still mixed. 

Rishi 

Hi Michael. My name is Rishi, I work with the HR Analytics team. Considering sectors like infrastructure and agriculture, which one do you think is more exposed to climate-related risks in the medium term, and why? 

Michael Penn 

Yeah, so climate—well, I guess it comes back to Tyler’s question about how we think about climate risk. I’m going to focus more on the physical side in answering that question, because that’s the area where we’re more confident it’s going to unfold. 

You mentioned agriculture, and I’d agree with that. I think agriculture probably has the biggest exposure of any major sector, but even within agriculture the exposure can vary. For example, products like coffee or cocoa are much less resilient to physical climate change, so their prices can move around a lot—certainly a lot less resilient than other agricultural products like grains or some of the soft commodities. Think of things like wheat or corn, which tend to be produced in countries that have better adaptation and resilience. Prices for those products don’t tend to vary as much, and they’re not as often in the direct firing line as crops like coffee or cocoa. 

I think you’re also right to identify infrastructure. Infrastructure assets have fixed locations and very long lifespans, which makes them vulnerable to slow-burn physical impacts like water stress, storms, or wildfires. These are big risks for utilities in particular. 

The other sector I’d flag is real estate, which faces both direct and indirect risks. Directly, if you own a beachfront property, you could suffer physical damage that’s costly to repair. Indirectly, there’s the risk of higher insurance costs. If people expect insurance prices to rise, property values can fall. Real estate is almost like a canary in a coal mine for climate risk. We’ve already seen this in the U.S., where certain insurance companies have withdrawn coverage in states like Florida or California due to climate-related risks. Without insurance, property values can be hit hard. 

So, agriculture, infrastructure, and real estate—those are the three big sectors to be watching. 

Zachary Baruch 

Hi Michael. My name is Zach, I’m an intern with the Learning and Development team. My question is: are markets becoming increasingly desensitized to geopolitical and policy uncertainty? 

Michael Penn 

Hi Zach. Yes, I think there probably is some sign of what I’d call “uncertainty fatigue,” if that’s a fair term. There’s no question that higher levels of policy uncertainty have become more normal. It may sound like an oxymoron to say uncertainty is normal, but markets are getting used to operating in a much more volatile environment. 

That said, if the economy is strong and central banks look ready to cut interest rates if uncertainty rises too much, those factors can act as a cushion against uncertainty. The problem is when a vague or uncertain risk becomes very concrete—markets can still shift very rapidly. 

Take the tariff announcement in April as an example. No one expected the tariff increases to actually occur. But when the announcement came, we saw a 10–15% overnight drop in U.S. stocks. It seemed like a credible threat, and then there was a quick reversal and rebound. So yes, markets may seem somewhat desensitized, but when a threat becomes real, markets can react very suddenly. 

Tyler Knohl 

Well, to wrap things up—thank you for tuning in to this special edition of the IBKR Podcast. We’d like to thank Michael Penn for his insights and time, and our interns for their thoughtful questions. Be sure to subscribe to the IBKR Podcasts on your preferred platform for more conversations on markets, trading, and global finance.