Climate Risks and Financial Stability

13 Pages Posted: 8 Feb 2021

See all articles by Stefano Battiston

Stefano Battiston

University of Zurich - Department of Banking and Finance; Ca Foscari University of Venice

Yannis Dafermos

SOAS University of London

Irene Monasterolo

Boston University; Vienna University of Economics and Business

Date Written: December 14, 2020

Abstract

Climate change has been recently recognised as a new source of risk for the financial system. Several financial supervisors with a financial stability mandate have recently recommended that investors and financial institutions need to assess their exposure to climate-related financial risks and conduct climate stress-tests. Nevertheless, they fall short of methodologies to do so. Indeed, the characteristics of climate risks (like deep uncertainty, non-linearities and endogeneity) challenge traditional approaches to macroeconomic and financial risk analysis. Embedding climate change in macroeconomic and financial analysis is fundamental for a comprehensive understanding of risks and opportunities in the era of the climate crisis. This Special Issue is devoted to the relations between climate risks and financial stability and represents the first comprehensive attempt to fill methodological gaps in this area and to shed light on the financial implications of climate change. It includes original contributions that use a range of methodologies, like network modelling, dynamic evolutionary macroeconomic modelling and financial econometrics, to analyse the impacts of climate-related financial risks, as well as of financial policies and instruments aiming at the low-carbon transition. The research insights of these contributions inform financial supervisors about the integration of climate change considerations in financial risk assessment.

Keywords: climate change, financial stability, climate policies, financial instruments, network models, stock-flow consistent models, agent based models, empirical finance.

JEL Classification: G10, G32, Q54

Suggested Citation

Battiston, Stefano and Dafermos, Yannis and Monasterolo, Irene, Climate Risks and Financial Stability (December 14, 2020). Available at SSRN: https://ssrn.com/abstract=3748495 or http://dx.doi.org/10.2139/ssrn.3748495

Stefano Battiston

University of Zurich - Department of Banking and Finance ( email )

Andreasstrasse 15
Zürich, 8050
Switzerland

Ca Foscari University of Venice ( email )

Cannaregio 873
Venice, 30121
Italy

Yannis Dafermos

SOAS University of London ( email )

Thornhaugh Street
Russell Square
London, WC1H 0XG
United Kingdom

Irene Monasterolo (Contact Author)

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

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