Climate change and financial stability risks

Financial stability may be threatened by both physical risks and transition risks related to climate change. The physical risks of climate change are becoming increasingly clear. These include both extensive fires caused by drought, as well as torrential rains and floods that cause injury to people, animals, nature and property. This can impair the value of collateral, which affects the risks faced by banks and other financial actors. This is one way in which physical risks can contribute to the emergence of systemic risks. Reduced biodiversity and the risks it may pose to food production are also a physical risk that follows on from climate change.

Transition risks can also give rise to stability risks. For example, this may happen in the form of targeted regulations for certain products or services that may result in increased costs for companies and sectors that are particularly exposed to such decisions. The transition may also lead to some assets becoming unusable or completely losing value, so-called stranded assets. This poses an increased risk of poorer profitability for these companies and thereby increased credit risks for the banks. An orderly transition would strengthen the conditions for limiting such risks.

If, on the other hand, the transition is too slow and measures to mitigate climate change are delayed or insufficient, climate risks will increase in the longer term. This can force a disorderly transition that can challenge financial stability and become even more risky.

International cooperation is key

Climate change is a global problem that requires global cooperation. It is therefore an important part of the Riksbank's sustainability work. If international cooperation on climate issues is weakened, the risk of a disorderly transition increases. Through its membership in the Network for Greening the Financial System (NGFS), a global partnership between central banks and supervisory authorities, the Riksbank makes an active contribution to strengthening the resilience of the international financial system. The Riksbank also participates in the Basel Committee to strengthen the resilience of the banking system and in the Committee on Payments and Market Infrastructures (CPMI) to strengthen the resilience of the financial infrastructure. Under the framework of the European Union, the Riksbank participates in working groups to develop measures and regulations on a European level.

An important part of international cooperation is to develop standards for sustainability data reported by companies. This requires reliable climate-related data for actors in the financial system to be able to assess and manage climate-related risks. In the absence of such data, or if it is inadequate, investors can easily get a misleading picture of the exposure of different companies to climate-related risks. Inadequate data can lead to companies investing capital in unsustainable companies, believing that these are sustainable, and thus exposing investors to unwanted risks. It can also counteract and delay the transition, thereby increasing the climate risks in the long term. To counteract these risks, it is necessary to use uniform and standardised frameworks that increase the transparency of climate-related data. An overview of different sustainability standards is provided in Table below.