New CEPR/IESE Report on the Resilience of the Financial System to Natural Disasters
Climate change and other natural disasters, including the Covid-19 pandemic, pose a severe threat to the financial system and the global economy – and central banks, asset managers, banks and businesses must all be part of building resilience, According to a new CEPR/IESE report by Patrick Bolton, Marcin Kacperczyk, Harrison Hong and Xavier Vives, central banks can play a proactive role in promoting mitigation policies and coordinating climate risk policies consistent with government mandates, the private sector and civil society.
The authors note that Covid-19 has exposed severe vulnerabilities in the global financial system, and serves as a cautionary tale for the potentially devastating effects that future natural disasters and climate change could cause to the world economy. The question of whether society is adequately prepared and what measures can be put in place to mitigate these risks has never been more pertinent. In particular, they explain, investments in climate mitigation could be as important for risk-management responses as vaccine development has turned out to be for the global pandemic.
The new report tests precisely how resilient the financial system is to natural disasters and discusses what can be done to make it more resilient. The report details how to reshape central bank policies to address climate-related risks, explores the role of asset managers in dealing with natural disasters and climate risk, and explains why mitigation is a form of self-insurance to limit the systemic risks of global warming.
This is the third report in the series on The Future of Banking, part of the Banking Initiative from the IESE Business School and supported by Citi. In the report, the authors explain that the financial sector – from banks and asset managers to supervisory regulators and central banks – must play a major role in the prevention and taming of these disruptive, environment-related events. To do so, climate risk drivers and their transmission channels must be accurately addressed, precise measurement of the economic and financial impact of the different risks is crucial, and mitigation and risk-reduction measures must be adequately developed.
“The Covid-19 crisis and the subsequent downturn have reinforced the need to evaluate and address highly disruptive environment-related events as well as the strategic importance of sustainable finance in the upcoming years”
Policymakers thus have a responsibility to guarantee the stability of the financial system and use the fiscal and environmental instruments at their disposal to fight climate change. Risk should not be measured through short-term horizons and there must be an internationally coordinated response to a global issue.
You can also read a VoxEU column here.