How might climate change risks impact a financial system? Please explain in your own words.

Climate change risks can have a significant impact on a financial system in several ways:

1. Physical Risks: These are direct risks to businesses due to extreme weather events such as floods, droughts, or storms. These events can damage infrastructure, disrupt supply chains, and increase operational costs. For example, a flood might damage a factory, causing it to shut down for repairs and thus affecting the company's revenue and the overall economy.

2. Transition Risks: These are risks associated with the transition to a low-carbon economy. As governments implement policies to reduce greenhouse gas emissions, companies in carbon-intensive industries may face increased costs, which can affect their profitability and share price. This can lead to financial instability if not managed properly.

3. Liability Risks: Companies could face legal action if they are found to be responsible for contributing to climate change. This could result in significant financial penalties, which would affect their financial stability.

4. Stranded Assets: As the world moves towards a low-carbon economy, fossil fuel-based assets may become 'stranded', meaning they lose their value because they cannot be sold or used. This could lead to significant losses for companies and investors.

5. Credit Risks: Banks and other financial institutions may face increased credit risks as borrowers affected by climate change may be unable to repay loans. This could lead to higher default rates and financial instability.

6. Market Risks: Climate change can lead to increased volatility in financial markets. For example, unexpected weather events can cause sudden changes in commodity prices, which can affect the value of investments.

In conclusion, climate change poses significant risks to the financial system. It is therefore crucial for financial institutions to consider these risks in their risk management strategies and for policymakers to implement measures to promote a sustainable economy.