Climate Change and the Financial System
24 Pages Posted: 12 Nov 2019 Last revised: 13 Jan 2020
Date Written: January 12, 2020
The financial system could play a main role in achieving the global climate targets by aligning investment flows to sustainability. However, investors are still largely exposed to carbon-intensive assets that could become stranded. In addition, they are not pricing yet climate risks and opportunities in their portfolios, thus exposing economies and society to new sources of financial instability. Here we present climate-related financial risks, we discuss why traditional economic approaches don’t allow to integrate such risks in financial valuation and risk management strategies, and why it matters for the implementation and feasibility of climate policies. Then, we introduce science-based, transparent climate-related financial risk metrics and methods (Climate Value at Risk, Climate Spread, Climate Stress-test) that help financial actors and policy makers to assess investments’ exposure to forward-looking climate risks, to price such risks in financial contracts and portfolios, and to evaluate the largest losses that could lead to financial instability.
Keywords: Climate risks, financial risk, carbon stranded assets, financial stability, climate policies, Climate Value at Risk, Climate Spread, Climate Stress-test
JEL Classification: G01, G11, G32, G33
Suggested Citation: Suggested Citation