Climate Risks and Financial Stability

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.