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2020 | Book

Sustainability and Financial Risks

The Impact of Climate Change, Environmental Degradation and Social Inequality on Financial Markets


About this book

Despite growing discussions on the relationship between sustainability and finance, so far little attention has been given to the relation linking sustainability-related risks and financial risks. Climate change, environmental degradation and social inequality, among others factors, may indeed have considerable adverse impacts on financial actors and markets, and even have the potential to harm financial stability. Shedding light on the importance of the nexus between sustainability and financial risks, this book addresses the need for new industry and policy approaches. With insights from a skilled set of scholars in the finance field, this edited collection explores the effects of climate risks on the banking and insurance industries, the problem of stranded assets, the possible corporate risk management frameworks that could be used to control sustainability-related risks, the role of non-financial disclosure in fostering market discipline, and the policy actions needed to integrate sustainability considerations into prudential supervision. Tackling an interdisciplinary topic, this book will appeal to academics and practitioners within the finance, business and sustainability fields.

Table of Contents

Chapter 1. The Sustainability–Financial Risk Nexus
This chapter gives an overview of the relationship nowadays linking sustainability-related risks (stemming from climate change, environmental degradation, social inequality, policy and technology shifts) and financial risks. Two main conclusions highlight the importance of this nexus. First, the expected consolidation of sustainability-related risks in the near future has the potential to produce a widespread impact on the financial results of both banks and insurance companies. Second, the full consideration by financial actors of sustainability-related risks may lead in some geographical areas and for some economic sectors to significant pricing adjustments and to new market failures (in terms of credit cutbacks and non-insurability of risks). The chapter concludes by proposing a structured taxonomy systematically linking sustainability-related risks and financial risks.
Marco Migliorelli
Chapter 2. The Impact of Climate Risks on the Insurance and Banking Industries
It is now largely recognised that the global climate has changed since the pre-industrial period. While the role of financial institutions in the transition to a low-carbon economy has received increasing attention over time, more limited has been the evidence on how climate change might affect financial institutions’ balance sheets. This chapter aims to redress this paucity of evidence by examining the impact of climate risks on the banking and insurance industries. To this purpose, it presents the main channels through which the physical, transition and liability risks of climate change might translate into financial risks for banks and insurance companies, along with the key data available to date. The extent to which climate risks might impair financial stability while causing new market failures is also discussed.
Giorgio Caselli, Catarina Figueira
Chapter 3. Stranded Assets and the Transition to Low-Carbon Economy
In the context of the low-carbon transition, stranded assets can be defined as assets that have suffered unanticipated or premature write-downs, devaluations or conversions to liabilities. These assets may refer to resource reserves, infrastructure or industries that may be affected by economic, physical or political changes along a pathway of decarbonisation. This chapter first gives a historical account of stranded assets in a low-carbon transition and presents a systematic review of the literature. Then, it proposes a comprehensive approach to understanding the multitude of factors resulting in stranded asset risk, by including case studies to show how responses to stranded asset risks vary by region. Finally, it offers a research agenda for future studies, addressing some of the limitations to current research.
Olaf Weber, Truzaar Dordi, Adeboye Oyegunle
Chapter 4. Sustainability-Related Risks, Risk Management Frameworks and Non-financial Disclosure
This chapter gives an overview of the main strategic and organisational implications for financial institutions when fully considering the actual and potential impacts of sustainability-related risks on their businesses. In this respect, the chapter first argues that, to ensure the effectiveness of the general risk management framework, developments are necessary at several levels of the organisation, in particular within the perimeter of competence of the management board, the risk management function and the operational business units. Then, the chapter discusses the issue of disclosing sustainability-related information by illustrating existing industry and policy standards. It concludes that more work is still needed in terms of quality and comparability of the information to foster market discipline via the disclosure of sustainability-related information.
Marco Migliorelli, Vladimiro Marini
Chapter 5. Sustainability-Related Risks and Financial Stability: A Systemic View and Preliminary Conclusions
This chapter discusses the possible impact of sustainability-related factors (such as climate change, environmental degradation, social inequality, policy and technology shifts) on financial stability. To this extent, it first identifies the areas in which an evolution of the practices of financial intermediaries are necessary to better manage sustainability-related risks. This refers in particular to the existing risk-management frameworks (which may not consider sustainability-related risks) and to the timespan of the risk-taking strategies (which typically underestimate the long-term nature of sustainability-related risks). Hence, the chapter discusses a set of policy actions to both mitigate and control for sustainability-related risks. In this respect, it focuses on the need of evolving the prudential supervisory approaches and on the possibility to assign a more active role to central banks.
Marco Migliorelli, Nicola Ciampoli, Philippe Dessertine
Sustainability and Financial Risks
Marco Migliorelli
Philippe Dessertine
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