Beyond ESG – climate change is rewriting today's market signals

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Heatwaves, wildfires and droughts grab the headlines. But climate change is also hitting us in a quieter, more pervasive way: prices. From food to insurance, costs are rising as markets factor in climate impacts. We are all paying the bill.

We are only beginning to grasp the broader implications of these changing signals. Businesses mostly respond on an ad hoc basis, and we lack a systematic approach to analyzing what these shifts really mean. When prices move, valuations change, incentives shift, and capital flows adjust. This recalibration goes beyond transition risk forecasts, carbon pricing models, or ESG disclosure debates.

Sustainability is becoming a core driver of strategic resilience, especially for companies facing disruption from the combined effects of climate volatility, geopolitical crises, and social challenges. This marks a structural shift in how risk is priced and how value is understood.

When crops fail, prices rise

Commodity markets provide an immediate example. As climate extremes grow more frequent and severe, they directly hit agricultural production, triggering sudden price spikes. Recent analysis shows extreme heatwaves, droughts, and floods driving staples to record highs.

Ghana and the Ivory Coast, which supply nearly 60% of global cocoa, endured unprecedented heat in February 2024 after a year-long drought, pushing cocoa prices up roughly 300% year-on-year by April. Likewise, Spain, responsible for more than 40% of global olive oil, was hit by severe droughts in 2022/23, driving EU olive oil prices 50% higher by January 2024 on top of earlier increases.

These are not isolated shocks but systemic stressors decoupling price movements from traditional supply-and-demand dynamics. Climate volatility erodes expectations, fragments supply chains, and fuels inflationary pressure. In developing economies where food dominates household spending, this strains monetary policy and destabilizes growth. Ripple effects widen inequality, worsen public health, and feed political instability. Scientists warn that unchecked warming could trigger cascading risks, not just for markets but for the institutions that depend on them.

Climate’s toll on home insurance

The home insurance market is also being reshaped. Premiums are rising sharply as insurers reassess flood, wildfire, and storm exposure. Global insured losses from natural catastrophes have exceeded $100 billion annually for four consecutive years (2020–2023), a record stretch forcing risk models to be rewritten. In the U.S., premiums rose 11% in 2023 alone to about $1,700 annually, with Florida households paying $6,000–$7,000, nearly four times the national average.

Major insurers have withdrawn from high-risk states like Florida and California, citing mounting billion-dollar losses. In some areas, premiums have jumped by over 50%, while government-backed “insurers of last resort” such as California’s FAIR Plan and the UK’s Flood Re are straining under the pressure. These are not just risk readjustments, they are real-time signals warning of the rising cost of living in hazard-prone regions 

For financial markets, this is a wake-up call. Historical pricing models no longer fit today’s realities. Insurers are increasingly offloading risk to capital markets, evidenced by record-breaking catastrophe bond issuance in 2025. But these shifts risk sending distorted or unaffordable price signals to households and regional economies, potentially destabilizing housing, insurance, and credit markets.

Central banks are also adjusting. The European Central Bank has introduced a climate factor into its collateral framework, discounting high-carbon assets used as collateral. For investors and banks, this is a shift in the rules of the game because it reflects an incentive to reassess portfolios and lending strategies.

From forecasts to facts

Markets are already shifting in response to climate realities. These aren’t forecasts; these are economic facts. The sooner we recognize that climate change is distorting the signals we use to allocate capital and assess value, the better equipped we will be to manage the systemic risks ahead.

For policymakers, these signals can flag inflationary pressure and social disruption, especially in vulnerable regions, guiding more equitable interventions. For businesses, shifting prices create a rational basis for investing in climate adaptation and mitigation, despite the lack of immediate returns. Nestlé, for example, frames such investments as essential for long-term supply chain resilience. For investors, climate-driven volatility demands new approaches to valuation, risk models, and portfolio strategy.

This does not mean “the market will fix it.” We need strong, ambitious regulation that matches today’s market realities. Most of all, business leaders must shift mindset: away from compliance and delay, toward fully acknowledging these new economic facts — and acting beyond ESG checklists.

Climate-altered price signals are not only real, they are consequential. We are moving from forecasts to facts. Recognizing and understanding these signals is a vital step toward building a financial system that is responsive, resilient, and fit for a warming world.

This article is also published on the author's blog. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.

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