What does climate change have to do with finance?

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melting polar ice sheet

By Yannis Dafermos (UWE Bristol) and Maria Nikolaidi (University of Greenwich)

 

It is now widely accepted that unless we take immediate action to reduce greenhouse gas emissions, climate change will damage our economies and societies in the next decades. But will global warming also affect the stability of the financial system?

Recent research suggests that this is a very likely outcome. For example, climate-related events, such as hurricanes, floods and typhoons, might destroy the property of households and the capital of firms, leading to a systemic rise in debt defaults. These defaults could impair the balance sheets of banks, with wider implications for the stability of the financial system. At the same time, the prices of stocks and bonds issued by companies facing climate-related losses might face declining demand by investors and might be destabilised.

But things can be even worse. If at some point in time climate policies are implemented abruptly or technology leads to a sudden shift to renewables, financial investors’ confidence in the future profitability of carbon-related sectors might be undermined. This could lead to a substantial re-valuation of the financial assets of these sectors, making them more vulnerable to defaults.

However, climate-related financial risks are not the only way through which finance and climate change are linked. There is now a lively debate about the way that central banks, commercial banks and financial markets could contribute to the transition to a low-carbon economy. Suggestions include the implementation of a green quantitative easing programme, the modification in the capital requirements of banks based on the extent to which they finance green investments and the establishment of climate-related financial disclosures. And although these potential interventions should not be viewed as substitutes for government climate policies, they might have a potentially valuable role to play in the fight against climate change.

In a workshop that we are organising at the University of Greenwich on 23 May, we will be discussing all these issues. The speakers of the event include Etienne Espagne (AFD), Rob Macquarie (Positive Money), Sini Matikainen (LSE), Hector Pollitt (Cambridge Econometrics) and ourselves. The event will be chaired by Charlotte Billingham (FEPS).

Please join us if you wish to learn more about the links between climate change and finance. Registrations can be done here.

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