Finance and climate change risk: managing expectations

Article by Mr Claudio Borio, Head of the Monetary and Economic Department of the BIS, Mr Stijn Claessens, Deputy Head of the BIS Monetary and Economic Department, and Mr Nikola Tarashev, Head of Financial Systems and Regulation, BIS, in VoxEU.org, published on 7 June 2022.

The financial sector has a key role to play in supporting the green transition. However, it is unrealistic to expect that it can drive the required reallocation of resources in the absence of adequate environmental policymaking in the real economy. Such unrealistic expectations could undermine financial stability and may derail the green transition itself. Moreover, the risks to financial stability are two-sided. Next to the risks that have attracted the bulk of the attention so far – those linked to exposures against overvalued emission-intensive assets ("brown vortices" or "brown runs") – one should not underestimate those linked to exposures to either overvalued "green" assets or to assets that purport to be green ("green bubble").