Finance, climate-change and radical uncertainty: Towards a precautionary approach to financial policy

Hugues Chenet, Josh Ryan-Collins and Frank van Lerven

Ecological Economics, 2021, vol. 183, issue C

Abstract: Climate-related financial risks (CRFR) are now recognised by central banks and supervisors as material to their financial stability mandates. But while CRFR are considered to have some unique characteristics, the emerging policy framework for dealing with them has largely focused on market-based solutions that seek to reduce perceived information gaps that prevent the accurate pricing of CRFR. These include disclosure, transparency, scenario analysis and stress testing. We argue this approach will be limited in impact because CRFR are characterised by radical uncertainty and hence ‘efficient’ price discovery is not possible. In addition, this approach tends to bias financial policy towards concern around avoiding short-term market disruption at the expense of longer-term, potentially catastrophic and irreversible climate risks. Instead, an alternative ‘precautionary’ financial policy approach is proposed that offers an intellectual framework for legitimizing more ambitious financial policy interventions in the present to better deal with these long-term risks. This framework draws on two existing concepts — the ‘precautionary principle’ and modern macroprudential policy — and justifies the full integration of CRFR into financial policy, including prudential, macroprudential and monetary policy frameworks.

Keywords: Financial stability; Financial regulation; Macroprudential policy; Central banks; Climate-related financial risks; Climate change; Sustainable finance; Systemic risk; Low carbon transition (search for similar items in EconPapers)
JEL-codes: E44 E58 G14 G18 G28 Q54 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (42)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolec:v:183:y:2021:i:c:s092180092100015x

DOI: 10.1016/j.ecolecon.2021.106957

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