Does climate change pose physical and transition risks to the financial stability of Türkiye? Evidence from Fourier Bootstrap ARDL

Türkiye is experiencing unprecedented events of climate-related natural disasters in recent years ranging from wildfires, drought, floods, and earthquakes. These natural disasters may trigger financial instability via physical risk, arising from damages to fixed capital, disrupting coastline operations, and decline in agricultural products. The introduction of environmental regulations, policies, and innovations aimed at the mitigation of physical risk might trigger transition risk. This affects the value of the assets held by businesses within the fossil fuel industry and carbon-related industries; leading to increased insurance liability, reduction in cashflows, profitability, and insurability of corporations that depend on ecosystem services. Thus, the impact of physical and transition risk on the financial stability of Türkiye was investigated from 1980-2020 using the novel Fourier Bootstrap ARDL technique. The analysis revealed that physical risk measured as the frequency of natural disasters increases the risk of financial instability in Türkiye both in the short and long run. Contrarily, transition risks measured by environmental taxes and environmental technologies were found to increase the financial stability in Türkiye. As a major policy implication, it is suggested that companies must consider the risk of climate change during the infrastructure planning and building process. In addition, the government should revise environmental taxes to boost environmental innovation for a sustainable future.