Physical and transition risks could combine to increase destabilisation, the FSB says in a new report, citing “numerous sources of uncertainty”.
Both the physical risks of climate change and a disorderly transition to a low-carbon economy could impose severe strains on the stability of the global financial system, according to a new report by the Financial Stability Board (FSB).
As well as potentially causing sharp falls in asset prices and destabilising the financial system, climate-related risks could distort and undermine market responses to shocks, further eroding stability, said the report, titled ‘The Implications of Climate Change for Financial Stability’.
Climate risks could lead to “abrupt” risk premia hikes across a wide range of assets, which could in turn alter price movements in multiple sectors and jurisdictions, also amplifying credit, liquidity and counterparty risks, posing unpredictable challenges for financial risk management techniques.
“Such changes may weaken the effectiveness of some current approaches to risk diversification and management,” said the FSB, warning of… [continues]
Read the full article on Regulation Asia’s sister publication, ESG Investor.