Embedded Files
Helpful prior knowledge and learning objectives
Helpful prior knowledge and learning objectives
Helpful prior learning:
Section 1.1.1 The economy and you, which explains what an economy is and how it is relevant to students’ lives
Section 1.1.2 The embedded economy, which explains the relationship between the economy and society and Earth’s systems
Section 6.1.1 Money systems, which describes the parts, relationships and functions of money systems
Section 6.1.2 History of money systems, which outlines the historical origins of different money systems and their functions
Section 6.1.3 Modern money creation, which explains how forms of money are created in modern money systems
Section 6.1.5 Ecological relationships and money, which explain how money is connected to Earth systems, often invisibly, and creates unequal access to resources
Section S.1 What are systems?, which explains what a system is, the importance of systems boundaries, the difference between open and closed systems and the importance of systems thinking
Section S.2 Systems thinking patterns, which outlines the core components of systems thinking: distinctions (thing/other), systems (part/whole), relationships (action/reaction), and perspectives (point/view)
Section S.5 Causal loops, feedback and tipping points, which explains the feedback loops that can stabilise or destabilise systems.
Section S.9 System traps, which explains how system structures, like reinforcing feedback, too weak or late balancing feedback, and/or pursuing flawed goals, can create persistent problems.
Learning objectives:
explain how financial flows drive planetary boundary overshoot
discuss how planetary boundary overshoot threatens the various financial tools of debt/credit, insurance, and investment
When Hurricane Otis struck Mexico’s Pacific coast in October 2023, it jumped from a tropical storm to a Category 5 hurricane in less than 12 hours. The storm caused widespread destruction in Acapulco (Figure 1), killing over 50 people and causing billions in damage. Many insurance companies had not expected such losses in that location.
What happens when climate disasters become too frequent or severe to insure? What if the financial system can no longer spread risk or even absorb it? And how is the financial system driving us past planetary boundaries in the first place?
Figure 1. Damage and destruction of buildings in Acapulco from Hurricane Otis.
(Credit: Copernicus Sentinel Data)
How do financial flows drive ecological overshoot?
How do financial flows drive ecological overshoot?
Planetary boundaries mark safe limits for disturbance to Earth systems (Section 1.2.7 and Figure 2). These include limits for climate change, biodiversity loss, freshwater use, land-use change, and more. When financial decisions ignore these boundaries, they can worsen environmental damage and threaten the conditions for life.
Despite scientific warnings and international agreements, banks, insurers, and investors continue to fund damaging activities. Fossil fuels, industrial agriculture, and mining still attract billions. In 2024 alone, global banks gave over US$869 billion to fossil fuel companies, including US$429 billion to firms expanding oil, gas, and coal (Figure 3). These financial flows delay the energy transition and lock in future emissions. Since the Paris Agreement in 2016, total fossil fuel financing has reached nearly US$8 trillion.
Figure 2. Planetary boundaries model
(Credit: Stockholm Resilience Centre CC BY-NC-ND 3.0)
The same pattern appears elsewhere. Agribusinesses finance monocultures that reduce biodiversity. Mining firms raise capital with little concern for pollution. These decisions reflect how finance is currently designed. As explained in Section 6.2.5, financial markets often operate far from the real world. Tools like shares, bonds, and insurance focus on price and risk, not nature.
Every financial flow is a claim on Earth’s energy and materials (Section 6.1.5). What seems profitable now may destroy the systems life depends on. The more money an actor controls, the more power they have to shape ecological outcomes.
And these flows are uneven. Wealthier countries tend to cause more ecological damage through their financial decisions, while lower-income countries often suffer the worst impacts. This global imbalance is explored further in Topic 7 International exchanges.
How does ecological damage threaten finance?
How does ecological damage threaten finance?
Financial systems worsen ecological damage, but they are also at risk because of it.
Credit and debt
Credit and debt
Lenders expect borrowers to repay loans with interest. But climate events can ruin crops, damage businesses, or disrupt transport. Borrowers may not be able to pay. Climate-related debt defaults are already rising. If this continues, banks may face serious losses, especially in regions most affected by ecological breakdown. Some central banks now treat environmental damage as a major threat to financial stability.
Figure 4. Climate change is causing severe weather events that wipe out crops, making it difficult for farmers to repay loans.
(Credit: joeyphoto, licensed from Adobe Stock)
Insurance
Insurance
Insurance spreads the cost of rare but harmful events. But as wildfires, floods and severe storms are more frequent, payouts are rising fast. In some places like Florida and California in the United States, private insurers have stopped offering flood or fire insurance. Elsewhere, insurance prices have risen beyond what many people can afford. Without coverage, communities will struggle to recover from worsening damage.
Investment
Investment
Ecological damage also affects investments in a number of ways:
stranded assets: stranded assets include physical capital that is no longer profitable. This can happen when governments introduce climate laws, or when clean energy outcompetes fossil fuels. Investors may then move their money away from fossil fuel companies to avoid losses.
legal action: scientists can now link specific companies to certain climate harms. In 2025, Peruvian farmer Saúl Luciano Lliuya sued German energy company RWE (Figure 6), claiming its emissions contributed to glacier melt threatening his home. While his specific case was dismissed, the court ruled companies can be held responsible for faraway climate damage. This creates real legal risks for polluting firms.
breakdown of Earth systems: a recent study found that each 1°C rise in global temperature could reduce global GDP by around 12%. Other estimates suggest climate-related costs could reach $38 trillion a year by 2050. These figures may underestimate the real danger. GDP misses much economic activity (Section 5.3.1), and the models don’t account for tipping points or ecological interdependence (Section 1.2.7 and Section S.5). Scientists warn that 3°C of warming could bring widespread food and water shortages, extreme heat, rising conflict, and mass displacement. These combined stresses could overwhelm society’s ability to adapt, especially in vulnerable regions.
Figure 5. Stranded assets, like this abandoned steel mill in Germany, are a risk for investors.
(Credit: Polybert49, CC BY-SA 2.0)
Figure 6. Peruvian mountain guide and farmer Saúl Luciano Lliuya’s lawsuit against German energy company RWE confirmed that fossil fuel companies can be held liable for climate change damage.
(Credit: Alexander Luna, CC BY-SA 4.0)
Some financial tools may reduce immediate losses for investors. But unless we shift the wider economic system, ecological breakdown will threaten both finance and human survival.
What would finance look like within planetary boundaries?
What would finance look like within planetary boundaries?
To stay within safe ecological limits, finance needs to support renewal rather than destruction. Some steps are already underway. The Science Based Targets for Finance initiative helps banks and asset managers assess whether their investments align with climate and biodiversity goals. The Finance for Biodiversity initiative encourages practices that protect living systems. These are promising signs, but they are voluntary, and still work within the current financial logic.
Real change would mean refusing to fund activities that cause large-scale harm. Finance could instead support renewable energy, public transport, ecological farming, and homes that promote wellbeing. It could also fund adaptation projects that protect people and ecosystems. Examples include planting trees in cities to reduce heat, restoring coastal barriers, or renovating buildings to stay cool.
Most of us do not choose to fund fossil fuels or deforestation, but our money often does. Bank accounts, pension schemes, and insurance policies pool our funds and invest them, often without our knowledge. These systems are designed to hide the real-world impact of money. As finance becomes more complex, these links grow harder to see.
But understanding those links matters. People can ask where their money is held, how it is used, and whether it supports a safer future. These choices alone won’t fix the system, but they can build pressure for deeper reforms.
In Subtopic 6.3, we explore how people, communities, and states are working to redesign finance for regenerative economies. This means again asking critical questions from Section 6.2.2:
Who has access to finance?
What goals are being financed?
What rules shape financial relationships?
Figure 7. Finance needs redirection to serve people and planet.
(Credit: Markus Spiske, Unsplash license)
Activity 6.2.6
Activity 6.2.6
Concept: Systems
Skills: Thinking skills (transfer and creative thinking)
Time: 40 minutes each
Type: Individual, pairs, or small group
Option 1: Ecological Overshoot and the Tools of Finance
In small groups, use the table below and the information from the text to explore how the three main financial tools relate to ecological overshoot.
Copy the following table onto a piece of paper, or into a digital document and individually, in pairs or a small group complete the information.
If there is time, come back together as a class and discuss:
Your ideas for reforming these financial tools
What might be the biggest challenges in reforming these financial tools?
Who benefits from the current system, and who might benefit from change?
Ideas for longer activities and projects are listed in Subtopic 6.5
Checking for understanding
Checking for understanding
Further exploration
Further exploration
The Climate Case: Peruvian Mountain Guide Saúl Luciano Lliuya vs. German Energy Company RWE - A 9-minute video explaining a groundbreaking legal case in which a Peruvian guide seeks partial financial support from energy giant RWE to pay for flood protection in his hometown. The case argues that RWE should help cover adaptation costs because its emissions contributed to glacial melt threatening his home.
Climate crisis on track to destroy capitalism, warns top insurer - An article in The Guardian about the warnings of insurance company Allianz that the world is getting so hot that it may soon be too risky to insure many climate-related events. In some places, insurance is already being taken away. Without it, other financial services like mortgages and investments may no longer be possible. Difficulty level: medium
FT series: the Uninsurable World - A Financial Times multimedia series exploring how rising climate risks are making some homes, farms, and businesses uninsurable. It shows why climate change is creating growing challenges for the global insurance industry. Difficulty level: medium
How the world's biggest bank is bracing for climate catastrophe - A 16-minute video from Just Have a Think comparing JP Morgan Chase’s climate strategy with UK actuaries’ warnings. The actuaries call for urgent systemic change based on compounding risks, while the bank focuses on adaptation and the economic opportunities of climate change, raising questions about responsibility and foresight in financial risk management. Difficulty level: easy
Sources
Sources
Bilal, A., & Känzig, D. R. (2024). The macroeconomic impact of climate change: Global vs. local temperature (NBER Working Paper No. 32450). National Bureau of Economic Research. https://doi.org/10.3386/w32450
Catanoso, J. (2025, May 9). Science lays out framework to assess climate liability of fossil fuel majors. Mongabay. https://news.mongabay.com/2025/05/science-lays-out-framework-to-assess-climate-liability-of-fossil-fuel-majors/
Clark, P. (2025, June 26). How the next financial crisis starts. Financial Times Magazine. https://www.ft.com/content/9e5df375-650d-492e-ba51-fb5a34e6ddd6?accessToken=zwAGOdC7hg_QkdOeXfN1ZQ1JLtO6UftaNObd1g.MEUCIQCr-cM0WfO1khUkkKuZI7fH87DkSXMn8Vd3NshqYGlL1QIgR0hX4K75L0MPGjLAkQC75cqBx00s32ARMdg9kpMllzU&sharetype=gift&token=71302cb9-35f7-4205-b28b-4fb731abcbd9
Hickel, J. (2020). Less Is More: How Degrowth Will Save the World. Penguin.
Hickel, J., O’Neill, D.W., Fanning, A.L., & Zoomkawala, H. (2022). National responsibility for ecological breakdown: a fair-shares assessment of resource use, 1970–2017. The Lancet Planetary Health, 6(4), e342–e349. https://doi.org/10.1016/S2542-5196(22)00044-4
Matikainen, S., & Soubeyran, É. (2022, July 27). What are stranded assets? The London School of Economics and Political Science, Grantham Research Institute on Climate Change and the Environment. https://www.lse.ac.uk/granthaminstitute/explainers/what-are-stranded-assets/
Milman, O. (2025, June 17). World’s largest banks pledged $869 bn to fossil fuel firms in 2024, new report finds: Two-thirds of the biggest 65 banks increased financing by $162 bn from 2023 to 2024, walking back climate promises. The Guardian. https://www.theguardian.com/business/2025/jun/17/world-banks-fossil-fuel-finance-2024
Nayak, S. (2024, July 31). India's top private lenders see farm loan defaults rising amid weak rural economy. Reuters. https://www.reuters.com/business/finance/indias-top-private-lenders-see-farm-loan-defaults-rising-amid-weak-rural-economy-2024-07-31/
Oil Change International, Rainforest Action Network, BankTrack, Indigenous Environmental Network, Reclaim Finance, Sierra Club, & Urgewald. (2025, June). Banking on climate chaos 2025: Fossil fuel finance report (M. Birss, Ed.). Oil Change International. https://www.bankingonclimatechaos.org
Raworth, K. (2017). Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist. Penguin.
Science Based Targets Initiative (n.d.) https://sciencebasedtargets.org/sectors/financial-institutions
Swiss Re Institute. (2024, April). Natural catastrophes in 2023: Gearing up for today’s and tomorrow’s weather risks (sigma No. 1/2024). Swiss Re Management Ltd. https://www.swissre.com/institute/research/sigma-research/sigma-2024-01.html
World Weather Attribution (n.d.). https://www.worldweatherattribution.org/
Valdre, P. & Einhorn, G. (2024, December 12). Climate risks are set to slash corporate earnings. Here’s what CEOs and boards can do. World Economic Forum. https://www.weforum.org/stories/2024/12/climate-risks-business-impacts-tipping-points-report/
Terminology (in order of appearance)
Terminology (in order of appearance)
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