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Annual Review of Resource Economics

Volume 12, 2020

Climate Change and the Financial System

Abstract

The financial system could help achieve the global climate targets by aligning investments to sustainability. However, investors are largely exposed to carbon-intensive assets that could become stranded, thus delaying the low-carbon transition and bringing new sources of risk for financial stability, i.e., climate-related financial risks. Here, we discuss climate-related financial risks, the challenges they pose to traditional economic and financial risk assessment, and the implications for the implementation and feasibility of climate policies. We then present science-based approaches that introduce forward-looking climate risks and their deep uncertainty in financial risk management (e.g., via the climate value at risk, climate spread, climate stress-test). Finally, we present results of applications aimed at pricing climate risks in investors’ portfolios and calculating the largest losses that could lead to systemic risk, in collaboration with leading financial institutions.

Keyword(s): climate policy, climate spread, climate stress-test, climate value at risk, climate-related financial risks, deep uncertainty, financial stability, JEL G0, JEL G1, JEL Q1, JEL Q5, risk management
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2020-10-06
2024-12-14
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/content/journals/10.1146/annurev-resource-110119-031134
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Climate Change and the Financial System
Annual Review of Resource Economics 12, 299 (2020); https://doi.org/10.1146/annurev-resource-110119-031134
/content/journals/10.1146/annurev-resource-110119-031134
/content/journals/10.1146/annurev-resource-110119-031134
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