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.
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
Climate Change and

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