Risk Modeling

CHAPTER 9The Interconnection between Climate and Financial Stability

Over decades, the discussions about climate change have been topics of both wide debate and scientific research. Questions have ranged from “What is climate change?” to “How can climate change be any different from natural climate variations?” to “Are we heading to a climate apocalypse?” The accumulated scientific research found that globally, atmospheric temperatures are rising above natural variations with potentially devastating consequences to people, communities, and impacting financial stability.

The tragedy of the horizon, as Mark Carney put it in his ground-breaking speech in 2015,¹ is also a tragedy of inequality where countries who are the bigger greenhouse gas emitters are also likely more resilient to the physical and transition risks of climate change.

Many industries have taken steps to better understand, quantify, and report on climate-related risks, and to devise strategies to mitigate the impacts of climate change. It is important to note that these initiatives are in their infancy. In the financial services industry, central banks, and regulators are raising awareness about the financial risks and opportunities of climate change. Recently, in 2021, more than 450 financial institutions representing $130 trillion of total assets committed to net-zero targets by 2050, as part of the Glasgow Financial Alliance for Net Zero (GFANZ).

It highlighted that the financial services industry has a key ...