Climate change, environmental sustainability, and financial risks: are we close to an understanding?

Abstract

Climate change and other threats to environmental sustainability will have an increasingly material impact on financial actors. However, transmission channels and possible spillover effects remain understudied. This review paper summarizes recent works published on these intersections and portraits venues for further research. In this respect, late advances on the control of the impact of climate change-related risks on financial risks have been relevant. New climate scenario analyses, stress testing techniques, and disclosure requirements have been recently introduced. Existing risk management frameworks are being updated to integrate climate change-related risks. Yet, as the development of new practices continues, the need for assessing their effectiveness and limitations, from a risk management as well as a financial stability perspective, remains. In this vein, sufficient attention needs also to be paid to emerging market failures linked to climate change. These include noninsurability of risks and credit rationing or mispricing, potentially hampering adaptation and mitigation investments in some areas. Last, while focus has been put thus far mainly on climate change, time has come to accelerate the debate on the financial implications of other threats to the environment. This is notably the case of loss of biodiversity, by also taking stock of the work of the Conference of the Parties (COP).