Positively Green: Measuring Climate Change Risks to Financial Stability

Better understanding of climate risk is needed to inform macroprudential policy decisions, according to this paper from the European Systemic Risk Board. At the same time, there must be a more comprehensive disclosure framework for banks, in order to improve the allocation of lending, the report adds.

The report also warns that the climate crisis will inevitably disrupt financial markets, with costs resulting from some combination of insufficient or untimely action to reduce emissions, and transition costs from stringent action. Financial markets have been pricing climate risk in a limited way, it goes on to say.

However the paper indicates that the costs to the banking sector of even a sharp rise in carbon pricing, or a significant industrial transition over a five-year timeframe, are likely to be lower than for the potential losses due to physical risks resulting from climate change.