Climate Change and Financial Risk

• Author: Pierpaolo Grippa - Jochen Schmittmann - Felix Suntheim
• Position: PIERPAOLO GRIPPA is a senior economist and FELIX SUNTHEIM is a financial sector expert in the IMF's Monetary and Capital Markets Department. JOCHEN SCHMITTMANN is the IMF's resident representative in Singapore.
• Pages: 26-29

26 FINANCE & DEVELOPMENT | December 2019

Central banks and financial regulators are starting to factor in climate change

Pierpaolo Grippa, Jochen Schmittmann, and Felix Suntheim

Climate change is a lready a reality. Ever-

more-ferocious c yclones and extended

droughts lead to the destr uction of infra-

structure and t he disruption of liveli-

hoods and contribute to mass migrat ion. Actions

to combat rising temperatures, inade quate though

they may have been so far, have the potential to

drive dislocation in the busines s world as fossil fuel

giants awaken to the need for renewable sources

of energy and automakers accelerate i nvestments

in cleaner vehicles.

But measuring economic costs of clim ate change

remains a work in progress. We can asse ss the

immediate costs of cha nging weather patterns and

more frequent and intense natural disasters, but

most of the potential costs lie beyond the horiz on

of the typical ec onomic analysis. e economic

impact of climate chang e will likely accelerate,

though not smoothly. Crucially for the coming

generations, the extent of the damag e will depend

on policy choices that we make tod ay.

Policymakers a nd investors increasing ly rec-

ognize climate change’s important implications

for the nancial sector. Climate change aects

the nancial system through two ma in channels

(see Chart 1). e rst involves physical risks,

arising from damage to property, infrastruct ure,

and land. e second, tran sition risk, results from

changes in cli mate policy, technology, and con-

sumer and market sentiment during the adjust ment

to a lower-carbon economy. Exposures can vary

signicantly from cou ntry to country. Lower- and

FINANCIAL RISK

Climate Change and