Fossil fuel finance enables climate change, and climate change threatens financial stability. This is the ‘climate-finance doom loop’ examined in this Finance Watch report by Thierry Philipponnat, Chair of the Climate and Sustainable Finance Commission at the French Financial Markets Authority. “Finance has become the enabler of a phenomenon that will end up destroying it,” says Philipponnat, referencing a recent analysis that 35 global banks provided over $2.7 trillion to the oil and gas industry in the four years following the Paris agreement in 2015.
Philipponnat argues that stress tests, climate-related financial disclosures and other transparency measures underestimate the climate risk to the financial system because the second-round transition effects can be large, unpredictable, non-linear and “almost impossible” to model. He goes on to say that even in a best-case scenario, more effective prudential interventions will take years to enter into force, by which time the planet’s carbon budget will be nearly exhausted.
Faced with the urgency of the climate crisis, Philipponnat points towards the EU’s Capital Requirements Regulation as a more direct instrument. He suggests the application of higher risk weights to fossil fuel assets at risk of stranding, and sets out the legal basis on which the EU could end the climate-finance doom loop.
This page was last updated May 17, 2021
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