Climate risk: we can measure it but can we govern it?

Over the past decade, sustainable finance has produced an increasingly sophisticated architecture for understanding climate risk, based on a deceptively simple idea: better information produces better decisions. The assumption is that if investors can understand climate risk, biodiversity loss or governance failures more accurately, capital should gradually flow towards more resilient investments.

To that end, disclosure standards have multiplied, scenario analysis has become routine and organisations are working to improve the consistency of climate reporting and risk assessment. Yet another challenge is becoming apparent. The Cambridge Institute for Sustainability Leadership recently argued that physical climate risk is accelerating faster than financial systems are adapting. Better information, while essential, cannot tell organisations how to make investment decisions whose consequences will play out over time.

Investment choices still have to be made under conditions of uncertainty, competing priorities and incomplete information. That uncertainty remains significant: the NGFS notes that estimates of the macroeconomic impact of physical climate risk still vary enormously, with projected GDP losses ranging from almost negligible to more than half of global output under different scenarios. The point is not that action should wait for certainty, but that institutions increasingly have to make major investment commitments without knowing exactly how future risks will unfold.

Markets often struggle to convert improved risk analysis into materially different choices about where and how capital is deployed. Recent OECD analysis warns that while climate considerations are becoming increasingly embedded within financial regulation and investment practice, evidence that they consistently change investment behaviour remains limited. That challenge is already visible across sectors: a June 2026 TU Delft analysis of the Dutch real estate market, Assessment without Adjustment, highlighted why the recognition of climate risk does not necessarily lead to different decisions (see Table 1).

Why climate risk assessments don't always change decisions
(adapted from "Assessment without Adjustment: Climate Risk Data and Dutch Real Estate Market" by Maged Elsamny, CC BY-NC-SA, redblueclimate.nl)

The problem is no longer primarily our ability to identify or measure climate risk. It is whether institutions can turn that knowledge into action, sustain it through changing priorities and adjust it as circumstances evolve. And that raises another question: if better information is no longer enough, what capabilities do institutions need in order to act on what they know?

Where risk becomes reality

Cities offer a useful way of exploring that question because they face many of the same conditions that investors increasingly encounter: uncertainty, competing priorities, incomplete information and choices whose consequences will emerge gradually as conditions change.

During a recent conversation with Jan van Zanen, Mayor of The Hague, a different perspective came into focus, not in the language of sustainable finance, but through the practical realities of governing a city preparing for climate change.

Climate risks may be analysed globally, but many responses are designed and delivered locally. Cities must decide whether to build flood defences, redesign streets for extreme heat or balance years of disruption against benefits that may not become fully visible for a generation. Such choices extend well beyond what reporting frameworks were designed to support.

Discussing climate adaptation, van Zanen spent remarkably little time talking about technical solutions or investment. Instead, he focused on leadership and local understanding. He said: "My favourite level of government is local government, because here, you can bike through your problems and bike through your solutions."

The lens of city government reveals a different dimension of climate risk. Financial markets encounter climate risk through models, disclosures and portfolio analysis, while cities encounter it through overflowing drains, overloaded electricity networks, rising temperatures, pressure on hospitals and neighbourhoods that experience the same event in very different ways. A heatwave quickly becomes a public health issue, a transport issue, an energy issue and a question of who is most vulnerable. Flooding affects insurance, housing, public finances and public confidence simultaneously.

Managing climate risk therefore becomes less about solving individual problems than about coordinating decisions across interconnected systems. That is also where the challenge for sustainable finance begins. Capital can finance individual assets, from flood defences, a transport system or a new energy network, but resilience ultimately depends on how those assets function together over time and how they are managed as conditions change.

Planning for a future no one can predict

Few public investment decisions require political and public support to be sustained over half a century. The Hague offers an unusually clear example of what this looks like in practice: its coastal strategy looks seventy-five years ahead, combining engineering, ecology and urban development while accepting that the climate, and the city's needs, will continue to change throughout that period.

Perhaps the most significant feature of the project is the way success is being measured. The city decided to work with a social cost-benefit assessment as it aims to create the greatest overall value for the city, reaching beyond financial and infrastructural indicators. The expanded dune landscape is expected to strengthen coastal resilience while also improving biodiversity, creating new recreational space, enhancing the public realm and supporting the city's long-term attractiveness as a place to live and do business.

The Hague's approach suggests another way of thinking about resilience. Rather than treating adaptation primarily as the cost of avoiding future losses, the city frames it as an investment for a more prosperous, liveable and adaptable place. That distinction has interesting implications for sustainable finance. If resilience creates economic, environmental and social value simultaneously, should financing decisions continue to evaluate it primarily through avoided losses, or increasingly through the broader value it creates?

Public support is as important as financial investment

Infrastructure designed to last for generations will inevitably require political support, changing priorities and continued investment long after today's decision-makers have gone. In the process of deciding on how to protect the coastline over the coming decades, the city worked with residents, businesses, researchers, the regional water authority and other public bodies to explore possible approaches. The preferred solution, centred on expanding the dune landscape, ultimately secured the support of 77% of participants.

The consultation process illustrates something that is often overlooked in discussions of climate investment. Major infrastructure programmes do not succeed because funding has been secured; they succeed because political support, institutional coordination and public legitimacy can be maintained throughout the life of the project. The Hague's extensive engagement with residents therefore offers an example of how cities attempt to build that legitimacy alongside the physical infrastructure itself.

By building public understanding and ownership into the process from the outset, The Hague is investing not only in physical resilience but in the institutional resilience needed to sustain it. In that sense, legitimacy is not separate from the engineering; it is one of the conditions that makes the engineering possible.

A different model of leadership

For van Zanen, resilience is as much about relationships as it is about infrastructure. That means creating the connections between people, organisations and public services before they are tested by a crisis. Throughout the conversation, Jan van Zanen kept returning to trust, communication and the practical realities of leading a city through difficult decisions.

His advice was strikingly simple: "Be accessible, be clear. Go to where the fire hits hardest." He argued that support for change comes less from persuading people than from making sure they feel they have been heard: "If you talk with people, give them attention... then nine times out of ten they understand."

Van Zanen described regular meetings with the organisations responsible for water, transport, energy and other critical services, working through what would happen if several systems came under pressure at the same time. The objective is not simply to protect individual services, but to understand how they depend on one another and how the city can continue to function when those connections are tested.

That perspective also shapes his work beyond The Hague. As co-president of United Cities and Local Governments, he sees cities as the place where national and international ambitions are ultimately tested against everyday reality. "If it doesn't work in my district," he said, "it won't work."

His comments describe a style of leadership that places less emphasis on having all the answers than on creating the conditions in which difficult decisions can be made and sustained over time. When asked what advice he would give to other urban leaders facing an increasingly unpredictable future, his answer was: "We should all work on resilience." For van Zanen, resilience is about more than physical infrastructure or emergency planning, it also depends on how institutions respond when circumstances change. "Keep it simple," he said. "Be responsive, the resilience of people is incredible… you have to believe in the people."

Van Zanen's comments suggest that those working in climate and sustainable finance should remember that resilience ultimately depends not only on risk metrics and financial analysis but also on people, institutions and public trust.

Financial markets have become much better at recognising climate risk, the more difficult question is whether recognising risk is enough. The experience of cities suggests that recognising climate risk is only the beginning. Responding to it effectively will require institutions capable of coordinating across organisations, maintaining public trust, navigating competing priorities and sustaining decisions through changing political and economic conditions.

The resilience that infrastructure needs to deliver depends equally on governance, legitimacy and adaptive institutions. Those qualities remain difficult to measure and even harder to finance, yet they may ultimately determine whether long-term investments achieve their purpose.

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