Climate-Related Risk Drivers and Their Transmission Channels

Climate-related financial risks can be captured through the traditional frameworks of banks and supervisors. But the drivers and impacts of climate risk are not sufficiently understood, and more research is needed, according to this paper from the Global Development Policy Center at Boston University.

The report argues that regulators and the wider research community must endeavour to build a better understanding of climate risk drivers and their impact on banks’ exposures across all risk types.

This paper considers how climate-related risk drivers, including physical risks and transition risks, can arise and affect both banks and the banking system via micro- and macroeconomic transmission channels.

It finds that the economic and financial market impacts of climate change can vary according to geography, sector and economic and financial system development. Although traditional risk categories used by financial institutions can be used to capture climate-related financial risks, there is limited research and accompanying data on the relationship between the two.