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The Finance-Climate Nexus

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Ecological Money and Finance

Abstract

There is a vicious circle linking finance and climate. By providing cheap and plentiful financing, whose risks are poorly priced to companies involved in fossil fuels research, exploration and production, financial institutions are enabling and accelerating climate change. In turn, global warming is a major source of financial systemic risk. The failure of market mechanisms to respect the carbon budget, to assess climate-based financial risks, and to reallocate financial flows on a more sustainable greenhouse gas emission pathway call for strong public interventions and for a strong involvement of both central banks and regulators in the structural change of finance.

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Notes

  1. 1.

    See https://www.bankofengland.co.uk/speech/2015/breaking-the-tragedy-of-the-horizon-climate-change-and-financial-stability.

  2. 2.

    See https://www.ngfs.net/en.

  3. 3.

    See www.fdb.org.

  4. 4.

    See https://newclimateeconomy.report/.

  5. 5.

    For example, the report recommends an end to tax breaks and other subsidies for fossil fuels, estimated by the OECD at 373 billion in 2015 alone, as well as an end to agricultural subsidies supporting climate-damaging food production, amounting to approximately 620 billion per year.

  6. 6.

    See https://www.ipcc.ch/languages-2/francais/.

  7. 7.

    See https://coalpolicytool.org.

  8. 8.

    See https://reclaimfinance.org/site/scan-finance-fossile/.

  9. 9.

    These tipping points are thresholds which, if exceeded, cause irreversible bifurcations in the climate.

  10. 10.

    See https://unfccc.int/fr/news/une-croissance-economique-respectueuse-du-climat-pourrait-rapporter-26-000-milliards-de-dollars-d.

  11. 11.

    The tragedy of the horizons can be described as a trade-off between transition risk and physical risk. Indeed, a rapid decarbonization of the economy means a short-term materialization of the transition risk, that is, a financial crisis of climate origin, but a long-term mitigation of the physical risk. The resulting time lag between the immediate financial and social-economic costs and the future gains is a major obstacle to ambitious climate policies.

  12. 12.

    Carney M. A new horizon, 21 March 2019 Speech. https://www.bankofengland.co.uk/-/media/boe/files/speech/2019/a-new-horizon-speech-by-mark-carney.pdf?la=en&hash=F63F8064E0408F038CABB1F29C58FB1A0CD0FE25.

  13. 13.

    See, for example: Jones, K.E., Patel, N.G., Levy, M.A., Storeygard, A., Balk, D., Gittleman, J.L., Daszak, P., 2008. Global trends in emerging infectious diseases. Nature 451, 990–993. https://doi.org/10.1038/nature06536.

    Smith, K.F., Goldberg, M., Rosenthal, S., Carlson, L., Chen, J., Chen, C., Ramachandran, S., 2014. Global rise in human infectious disease outbreaks. Journal of The Royal Society Interface 11, 20140950. https://doi.org/10.1098/rsif.2014.0950.

    Morand, S. Emerging diseases, livestock expansion and biodiversity loss are positively related at global scale. Biological Conservation 248, 108707 (2020).

    Hurst, C.J. (Ed.), 2018. The Connections Between Ecology and Infectious Disease, Advances in Environmental Microbiology. Springer International Publishing. https://doi.org/10.1007/978-3-319-92373-4.

  14. 14.

    Intergovernmental Science-Policy Platform On Biodiversity And Ecosystem Services (IPBES). “Workshop Report on Biodiversity and Pandemics of the Intergovernmental Platform on Biodiversity and Ecosystem Services (IPBES)”. 29 October 2020.

  15. 15.

    Some players in the insurance world, such as Henri de Castries when he was CEO of Axa (a French insurance company), have warned about the difficulty of insuring a world at +4°C. Indeed, certain economic activities cannot continue without insurance or when the costs of insurance become prohibitive. See https://www.axa.com/fr/presse/evenements/cop-21-paris.

  16. 16.

    Even though public policies in this area lack transparency, predictability, and commitments lack credibility.

  17. 17.

    See Schoenmakers, Dirk. [2021], “Greening Monetary Policy”. Climate policy, vol 21, No 4, 581–592.

  18. 18.

    A complementary instrument aimed at restricting the concentration of exposures to a single type of counterparty could also be activated. This type of prudential instrument exists and aims to limit the maximum possible losses in the event of a default by a counterparty or a group of counterparties with the same risk. This type of measure applied to high-carbon emitting sectors would protect against the risk of transition and therefore highly correlated losses on brown sectors. Bank exposures could not exceed a certain fraction of their common equity capital.

  19. 19.

    See https://www.finance-watch.org/.

  20. 20.

    See https://www.banque-france.fr/intervention/green-swan-central-banking-and-financial-stability-age-climate-change-banque-des-reglements.

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Scialom, L. (2023). The Finance-Climate Nexus. In: Lagoarde-Segot, T. (eds) Ecological Money and Finance. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-14232-1_12

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  • DOI: https://doi.org/10.1007/978-3-031-14232-1_12

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