With the right tools, policymakers can help to manage the climate risks impacting economies and financial systems
By Tobias Adrian, Vikram Haksar, Ivo Krznar
When it comes to the devastating impact of climate change, most people think of the harm inflicted on lives and livelihoods. Yet the effects of more frequent and extreme weather are just as consequential for the health of financial systems.
The physical impacts of climate-related shocks, such as hurricane damage to power grids, affect financial institutions and how they make decisions. So do the risks of transition to a low-carbon economy. Think of the costs of new carbon taxes or new laws that require phase-outs of fossil fuels before greener replacements are available.
To make well-informed decisions about future operations, banks, insurers, and others in the financial sector need tools to manage climate risks in their operations and balance sheets. At the same time, as financial supervisors monitor the resilience of the system, they need tools to adequately assess and supervise these risks.
