Climate change does not yield to the financial system
Climate change and the green transition of the economy have a bearing on the financial system and its risks. The Bank of Finland is examining how climate change, biodiversity loss and the green transition affect financial stability and how the emerging stability risks could be prevented.
The Bank of Finland promotes financial stability. As part of this task, the Bank of Finland is examining how climate change, biodiversity loss and the green transition are affecting the financial system and its stability, both in Finland and more broadly.
Climate change and the green transition of the economy required to slow it down have a bearing on the financial system and its risks. For example, an increase in floods in areas prone to flooding may increase the risks of housing and corporate loans granted to these areas. Banks and insurance companies must take the increase in these risks into account in their activities and risk management. The transition to a lower-carbon society and economy requires financing and may alter the funding opportunities available for carbon-intensive sectors.
The Bank of Finland seeks to increase understanding of the diverse mechanisms whereby climate change and the green transition are affecting the economy and the financial system as well as the consequences of the transition and the resulting systemic risks. In recent years, significant steps have been taken in the analysis of the impacts of climate change on economic and financial stability. The Bank of Finland contributes actively to these efforts. Risks caused by climate change and banks’ exposure to climate risks are also taken into account in the stress tests conducted by the European Central Bank on a regular basis.
Information, understanding and analytical tools still being developed are necessary to be able to make policy recommendations to mitigate the risks caused by climate change to financial stability. The introduction of macroprudential tools targeting climate risks is also being prepared for within the European Union.
The Bank of Finland is a member in the Network for Greening the Financial System (NGFS) of central banks and financial supervisors, which is committed to sharing information and developing best practices for the management of climate risks in the financial system.