The effects of climate change on financial stability, with particular reference to Sweden

February 2016

The effects of climate change on financial stability

The 21st Conference of the Parties to the UN Framework Convention on Climate Change in Paris in December 2015 has once again raised public awareness about the pervasive ramifications of climate change and its mitigation. The Fifth Assessment Report of the Intergovernmental Panel on Climate Change, published in 2014, collated extensive evidence about the impacts of climate change and its mitigation one conomies around the world. Although these impacts will differ according to geographic factors, endowments of resources, income levels and economic structures, no countries, including Sweden, will be left untouched.

The financial sectors of economies will be amongst those affected, giving rise to risks to financial firms, not least because the prospects for climate change and its mitigation are fraught with uncertainty. Both entail costs, risks and opportunities for financial sector institutions and their customers. For example, climate change is increasing the risk of large losses to insurers from extreme weather events. It also raises the possibility of litigation about who is legally responsible for climate‐related natural disasters. These are examples of ‘climate risks’. Policies to reduce greenhouse gas emissions may undermine the business plans and reduce the value of fossil‐fuel owning firms and energy‐intensive companies. They may also lead to sharp changes in the direction of financial investment flows. These are examples of ‘carbon risk.’ Both categories of risk affect asset managers and financial intermediaries, given the possible impacts on asset valuations, creditworthiness and cash flows.

In April 2015, the G20 group of countries asked the Financial Stability Board (FSB) to convene a review of how the financial sector “can take account of climate‐related issues.” A number of central banks – including the European Central Bank, the Bank of England and the central banks of China, Bangladesh and Brazil – are already taking explicitly climate‐related actions (UNEP2015). As Governor Mark Carney of the Bank of England has said, “Forward‐looking regulators consider not just the here and now, but emerging vulnerabilities and their impact on business models” (Carney 2015).

This report reviews the nature of ‘climate risk’ and ‘carbon risk’, noting their significance while also drawing attention to the uncertainties in climate science, economics and policy. It then goes on to consider how these categories of risk are likely to interact with financial sectors and why regulators should consider these interactions on micro‐ and macroprudential grounds. Where possible, the risks in the Swedish context are analysed. The structure reflects the schematic representation of the connections between climate‐related risks and the financial sector. The report concludes with a brief discussion of some policy issues for regulators that emerge from this review.


Client: Finansinspektionen (The Swedish Financial Supervisory Authority)

Authors: Alex Bowen & Simon Dietz

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