Climate roundup: FSB on implications of climate change for financial stability

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The Financial Stability Board (FSB) has published a report today discussing how climate risks might impact, or be amplified by, the financial system, particularly focusing on the channels that could materialise in the short to medium term.

Current central estimates of the impact of physical risks on asset prices appear relatively contained but may be subject to considerable tail risk, the report found.

“The manifestation of physical risks could lead to a sharp fall in asset prices and increase in uncertainty. A disorderly transition to a low carbon economy could also have a destabilising effect on the financial system,” it said.

The FSB also said that climate-related risks – physical and transition risks – may also affect how the global financial system responds to shocks. They may give rise to abrupt increases in risk premia across a wide range of assets.

“This could alter asset price (co-)movement across sectors and jurisdictions; amplify credit, liquidity and counterparty risks; and challenge financial risk management in ways that are hard to predict.”

The FSB said that such changes may weaken the effectiveness of some current approaches to risk diversification and management. This may in turn affect financial system resilience and lead to a self-reinforcing reduction in bank lending and insurance provision, it added.

There are various actions that financial institutions can take – and are taking – to reduce or manage their exposure to climate-related risks, the FSB said. However, the efficacy of such actions taken by financial firms may also be hampered by a lack of data with which to assess clients’ exposures to climate-related risks, or the magnitude of climate-related effects.

“Robust risk management might be supported by initiatives to enhance information with which to assess climate-related risk,” it said.

The FSB will conduct further work to assess the availability of data through which climate-related risks to financial stability could be monitored, as well as any data gaps.

Emerging markets at greatest risk of climate change, say Oxford uni, Pictet

The Smith School of Enterprise and the Environment at the University of Oxford along with Pictet Asset Management have warned that unmitigated climate change could slash world economic output per capita by as much as half by the end of the century, with emerging markets (EM) bearing the brunt of the damage.

According to a new research report produced by the duo, major emerging economies including China, India and Brazil are far more vulnerable to rising global temperatures than their advanced counterparts.

People in China could be 25% poorer by the end of the century if nothing at all is done to slow the rise in global temperatures, the report found, while India risks more than a 60% shortfall in GDP per capita by the end of the century.

In Brazil, meanwhile, climate change is set to have a major impact on water availability – by the end of this century, two-thirds of the country may be classified as arid. This will hurt harvests and energy production – hydro power accounts for some 60 per cent of the country’s electricity supply. Similar issues confront Mexico, Indonesia and South Africa, the research diclosed.

Cameron Hepburn, professor of environmental economics and director of the Smith Schoolm said: “Compounding the challenge of how to negotiate the long-term peril presented by climate change is a more immediate crisis – the COVID-19 pandemic that has ravaged communities around the world.”

He added that the vast fiscal and monetary packages governments continue to put in place to support their economies over the near-term can also “considerably help efforts to limit global warming over decades to come if invested wisely”.

Laurent Ramsey, managing partner of Pictet Group and CEO at Pictet AM, said: “To solve and adapt to the effects of climate change will require a great deal of human ingenuity, technological advancement and the application of what we learn through experience and education.”

The report was commissioned by Pictet AM earlier this year as part of a broader effort to help the asset management group and its clients better understand the investment implications of climate change and environmental degradation.