{ "title": "Climate Change, Central Banks and Financial Risk – IMF F&D | DECEMBER 2019", "sourceUrl": "https://www.imf.org/en/publications/fandd/issues/2019/12/climate-change-central-banks-and-financial-risk-grippa", "canonical": "https://www.imf.org/en/publications/fandd/issues/2019/12/climate-change-central-banks-and-financial-risk-grippa", "overlayPath": "/en/publications/fandd/issues/2019/12/climate-change-central-banks-and-financial-risk-grippa/index.md", "summary": "How are central banks and financial regulators starting to factor in climate change? The IMF explores why policymakers and investors are increasingly recognizing the implications that climate change has on the financial sector", "sections": [ { "heading": "Overview", "content": "- Climate change creates both physical risks (damage from cyclones, droughts, sea-level rise, extreme weather) and transition risks (policy, technological, and market shifts toward a lower-carbon economy).\n- Measuring economic costs remains incomplete: immediate costs from weather events can be assessed, but most potential costs lie beyond the horizon of typical economic analysis and will depend on policy choices made today.\n- Policymakers and investors increasingly recognize climate change’s implications for financial stability and the allocation of capital." }, { "heading": "Channels of Financial Risk", "content": "- Physical risks:\n - Direct exposures through corporations, households, and countries experiencing climate shocks.\n - Indirect exposures via macroeconomic effects and feedbacks within the financial system.\n - Example: rising sea levels and extreme weather can reduce property values and increase mortgage portfolio risk.\n - Insurance and reinsurance face asset-side and liability-side pressures as claims increase in frequency and severity.\n- Transition risks:\n - Losses on assets tied to firms with high carbon-intensity as policies, technologies, and sentiment shift.\n - Risk of “unburnable” fossil fuel reserves as demand and policy change (reference to Bank of England Governor Mark Carney, 2015).\n - Example: coal producers face policy constraints; some large banks no longer finance new coal facilities.\n- System-wide effects:\n - Abrupt, poorly designed, or uncoordinated transitions can disrupt trade and lead to rapid asset-price adjustments.\n - Markets may partly price climate risks, but asset prices may not fully reflect the potential damage or necessary policy action to limit warming to 2˚C or less." }, { "heading": "Impacts on Financial Institutions", "content": "- Banks:\n - Increased default risk in loan portfolios and asset-value declines.\n - Potential for tighter financial conditions if lending contracts following widespread climate shocks.\n- Insurers and reinsurers:\n - Higher insurance costs or unavailability in high-risk areas.\n - Reduced diversification as previously uncorrelated events become correlated.\n- Asset managers and investors:\n - Repricing of carbon-intensive assets; the emergence of a “carbon discount” in market valuations.\n - Opportunities in financing mitigation and adaptation investments.\n- Examples:\n - Pacific Gas and Electric’s bankruptcy linked to climate-related fires (Gold 2019)." }, { "heading": "Regulatory Responses and Challenges", "content": "- Central banks and supervisors are integrating climate-related risks into supervision and financial stability monitoring.\n - The Network of Central Banks and Supervisors for Greening the Financial System (NGFS) comprises 42 members and is developing guidance and analytical work.\n- Prudential policy adaptations:\n - Incorporate climate risk scenarios into stress tests (examples: UK prudential regulators including climate scenarios in insurance stress tests).\n - Adapt prudential frameworks to assess long-horizon climate risks using new methodologies.\n - Caution against policies that weaken prudential regulation (e.g., allowing lower capital charges solely for “green”-labeled debt could increase leverage if underlying risks are not properly measured).\n- Monetary policy implications:\n - Climate change can slow productivity growth, increase uncertainty, and raise inflation volatility.\n - Central banks should consider adapting refinancing frameworks and haircuts to account for climate exposures.\n - Central banks can integrate sustainability considerations into management of their own funds, pension funds, and, to the extent possible, international reserves (NGFS 2019 recommendation)." }, { "heading": "Financial Sector Contribution and Sustainable Finance", "content": "- Primary role of fiscal policies (carbon pricing) in reducing emissions and mobilizing revenue; financial sector plays a complementary role.\n- Finance provides risk-sharing (insurance, catastrophe bonds) and can mobilize capital for mitigation and adaptation.\n- Investment needs:\n - Global infrastructure investments estimated at about $6 trillion per year up to 2030 (OECD 2017).\n- Sustainable finance growth:\n - Global asset estimates range from $3 trillion to $31 trillion.\n - Green bond stock estimated at $590 billion in August 2019 from $78 billion in 2015.\n- Mechanisms for investor influence:\n - Engagement with companies, investor activism, and lending to sustainability leaders send price signals allocating capital to low-carbon activities.\n- Risks and challenges:\n - Measuring environmental impact is difficult.\n - Greenwashing concerns may deter investment scaling if policy action lags." }, { "heading": "IMF Role, Analytical Work, and Data Needs", "content": "- IMF mandate aligns with analyzing risks and advising members on macro-financial policies; integrating climate risks into these activities is critical.\n- Stress testing enhancements:\n - Improve stress tests within the Financial Sector Assessment Program to capture physical and transition risks.\n - Recent country examples: scenario-based stress tests analyzing severe hurricanes and massive natural disasters for The Bahamas and Jamaica.\n - Ongoing work: analysis of financial system exposure to transition risk in an oil-producing country.\n- Collaboration and standard-setting:\n - The IMF has joined the NGFS and collaborates on developing analytical frameworks for climate-related risks.\n- Data and disclosure:\n - Closing data gaps and standardizing climate-risk reporting in financial statements are crucial for accurate exposure assessment.\n - Support for broader adoption of the Task Force on Climate-related Financial Disclosures (2017) recommendations to improve comparability and usability of disclosures.\n- Overall message:\n - Empirical assessment of climate costs is necessary; finance must manage the transition to a low-carbon economy to mitigate costs and capture opportunities for future generations." }, { "heading": "Key Figures and Facts (verbatim)", "content": "- NGFS comprises 42 members.\n- Target climate limit referenced: 2˚C or less.\n- Global infrastructure investment need: about $6 trillion per year up to 2030 (OECD 2017).\n- Estimates of the global asset size of sustainable finance range from $3 trillion to $31 trillion.\n- Green bond stock: $590 billion in August 2019 from $78 billion in 2015.\n- References cited: Carney, Mark. 2015; Gold, Russell. 2019; NGFS (2019); OECD (2017); Task Force on Climate-related Financial Disclosures. 2017.\n\nContent based on \"Climate Change and Financial Risk\" by Pierpaolo Grippa, Jochen Schmittmann, and Felix Suntheim, F&D Magazine, December 2019.\n\n---\n\n Content in this bundle\n\n- تغير المناخ والمخاطر المالية\n - تغير المناخ والمخاطر المالية (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - تغير المناخ والمخاطر المالية (PDF){rel=\"external\" type=\"application/pdf\"}\n- Climate Change, Central Banks and Financial Risk – IMF F&D | DECEMBER 2019\n - Climate Change, Central Banks and Financial Risk – IMF F&D | DECEMBER 2019 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - Climate Change, Central Banks and Financial Risk – IMF F&D | DECEMBER 2019 (PDF){rel=\"external\" type=\"application/pdf\"}\n- Cambio climático y riesgo financiero ● Finanzas y Desarrollo ● Diciembre de 2019\n - Cambio climático y riesgo financiero ● Finanzas y Desarrollo ● Diciembre de 2019 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - Cambio climático y riesgo financiero ● Finanzas y Desarrollo ● Diciembre de 2019 (PDF){rel=\"external\" type=\"application/pdf\"}\n- Changements climatiques et risque financier\n - Changements climatiques et risque financier (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - Changements climatiques et risque financier (PDF){rel=\"external\" type=\"application/pdf\"}\n- Изменение климата и финансовый риск – Финансы и развитие – декабрь 2019 года\n - Изменение климата и финансовый риск – Финансы и развитие – декабрь 2019 года (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - Изменение климата и финансовый риск – Финансы и развитие – декабрь 2019 года (PDF){rel=\"external\" type=\"application/pdf\"}\n- Climate Change, Central Banks and Financial Risk – IMF F&D | DECEMBER 2019\n - Climate Change, Central Banks and Financial Risk – IMF F&D | DECEMBER 2019 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - Climate Change, Central Banks and Financial Risk – IMF F&D | DECEMBER 2019 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/fandd/issues/2019/12/climate-change-central-banks-and-financial-risk-grippa" } ], "bullets": [ "[Markdown version](/en/publications/fandd/issues/2019/12/climate-change-central-banks-and-financial-risk-grippa/index.md)", "[Structured JSON version](/en/publications/fandd/issues/2019/12/climate-change-central-banks-and-financial-risk-grippa/index.json)", "[Bundle manifest](/en/publications/fandd/issues/2019/12/climate-change-central-banks-and-financial-risk-grippa/bundle-manifest.json)", "Authors: PIERPAOLO GRIPPA, JOCHEN SCHMITTMANN, FELIX SUNTHEIM", "Published: December 1, 2019", "Climate change creates both physical risks (damage from cyclones, droughts, sea-level rise, extreme weather) and transition risks (policy, technological, and market shifts toward a lower-carbon economy).", "Measuring economic costs remains incomplete: immediate costs from weather events can be assessed, but most potential costs lie beyond the horizon of typical economic analysis and will depend on policy choices made today.", "Policymakers and investors increasingly recognize climate change’s implications for financial stability and the allocation of capital.", "Physical risks:", "Transition risks:", "System-wide effects:", "Banks:", "Insurers and reinsurers:", "Asset managers and investors:", "Examples:", "Central banks and supervisors are integrating climate-related risks into supervision and financial stability monitoring.", "Prudential policy adaptations:", "Monetary policy implications:", "Primary role of fiscal policies (carbon pricing) in reducing emissions and mobilizing revenue; financial sector plays a complementary role.", "Finance provides risk-sharing (insurance, catastrophe bonds) and can mobilize capital for mitigation and adaptation.", "Investment needs:", "Sustainable finance growth:", "Mechanisms for investor influence:", "Risks and challenges:", "IMF mandate aligns with analyzing risks and advising members on macro-financial policies; integrating climate risks into these activities is critical.", "Stress testing enhancements:", "Collaboration and standard-setting:", "Data and disclosure:", "Overall message:", "NGFS comprises 42 members.", "Target climate limit referenced: 2˚C or less.", "Global infrastructure investment need: about $6 trillion per year up to 2030 (OECD 2017).", "Estimates of the global asset size of sustainable finance range from $3 trillion to $31 trillion.", "Green bond stock: $590 billion in August 2019 from $78 billion in 2015.", "References cited: Carney, Mark. 2015; Gold, Russell. 2019; NGFS (2019); OECD (2017); Task Force on Climate-related Financial Disclosures. 2017.", "**تغير المناخ والمخاطر المالية**", "**Climate Change, Central Banks and Financial Risk – IMF F&D | DECEMBER 2019**", "**Cambio climático y riesgo financiero ● Finanzas y Desarrollo ● Diciembre de 2019**", "**Changements climatiques et risque financier**", "**Изменение климата и финансовый риск – Финансы и развитие – декабрь 2019 года**", "**Climate Change, Central Banks and Financial Risk – IMF F&D | DECEMBER 2019**" ], "related": [ { "title": "تغير المناخ والمخاطر المالية", "role": "document", "sourceUrl": "https://www.imf.org/-/media/files/publications/fandd/article/2019/december/ar/grippa.pdf", "summary": { "path": "/-/media/files/publications/fandd/article/2019/december/ar/grippa.pdf.md", "mime": "text/markdown" }, "binary": { "path": "/-/media/files/publications/fandd/article/2019/december/ar/grippa.pdf", "mime": "application/pdf" } }, { "title": "Climate Change, Central Banks and Financial Risk – IMF F&D | DECEMBER 2019", "role": "document", "sourceUrl": "https://www.imf.org/-/media/files/publications/fandd/article/2019/december/climate-change-central-banks-and-financial-risk-grippa.pdf", "summary": { "path": "/-/media/files/publications/fandd/article/2019/december/climate-change-central-banks-and-financial-risk-grippa.pdf.md", "mime": "text/markdown" }, "binary": { "path": 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