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There is growing awareness among financial practitioners, regulators and central bankers of the potential negative implications of climate risks for prices and financial stability, and the need of tailored metrics and methods for portfolios’ climate-related financial disclosure. On the one hand, climate change could induce financial losses for the insurance and the banking sector as a result of climate-related events (such as droughts, hurricanes and floods). On the other hand, the transition to a low-carbon economy could lead to a re-pricing of carbon-intensive assets and thus to financial problems for companies whose revenues depend directly or indirectly on fossil fuels, with wider implications for financial stability.
Recent studies conducted both by academics and central banks show that the exposure of the financial system to climate risks is considerable (Dietz et al., 2016; Regelink et al., 2017). In particular, the first climate stress-test of financial portfolios shows that the exposure of investors’ portfolios to carbon intense assets could reach even 45% for pension funds and investment funds (Battiston et al., 2017). Moreover, such a climate-related financial risk could be amplified by financial interconnectedness, raising concerns on systemic financial stability (ESRB 2016).
In 2015, Mark Carney, the Governor of the Bank of England, pointed out that climate change is very likely to impose significant risks on prices and financial stability (Carney, 2015), a concern that was later shared by a growing number of central bankers (e.g. Villerov de Galhau, 2015; Dombret, 2017; Draghi, 2017; Signorini, 2017). Further, the G20’s Financial Stability Board established a Task Force on Climate-Related Financial Disclosure (TCFD) that has already made sector-specific recommendations to foster companies’ voluntarily disclosure of climate-related financial risks, and has also recommended new metrics and methods (e.g. climate stress-tests) to better inform their investors, lenders and insurance underwriters (TCFD, 2017). In order to mitigate climate-related financial risks, a transition to sustainable finance was advocated by the European Commission’s High Level Experts Group on Sustainable Finance (HLEG), that recommended the consideration of new policies and financial regulations (e.g. differentiated banks’ capital requirements for green and carbon-intense assets) and the introduction of green financial instruments (e.g. green bonds) and metrics for climate-related financial disclosure (HLEG 2018).
Despite this growing interest in climate risks and financial stability, academic research on these issues is still limited. In order to fill this gap, the International Conference on Economic Modelling (EcoMod) is organising a special session on ‘Climate risks and financial stability’. We welcome contributions that focus both on the physical and the transition climate-related financial risks using
network analysis, agent-based approaches, macroeconomic dynamic modelling and econometric approaches. We also welcome contributions that analyse climate-related developments in the financial markets (e.g. the green bond market) and the conditions under which the gap between finance and sustainability could be reduced thanks to central banks’ policy tools (e.g. unconventional monetary policies such as the quantitative easing, and collateral framework) and macroprudential regulation (e.g. by including green supporting factors or brown penalising factors in banks’ capital requirements).
The papers that will be presented at the special session might be considered for a special issue in a top-tier finance journal (talks ongoing with the Journal of Financial Stability).
Abstracts (300-500 words) should be sent via email to Yannis.Dafermos@uwe.ac.uk and irene.monasterolo@wu.ac.at by 21 May. Notifications will be emailed out by 28 May.
Special session organisers: Stefano Battiston (University of Zurich), Yannis Dafermos (University of the West of England) and Irene Monasterolo (Vienna University of Economics and Business)
