Transitional and physical risks related to climate change have the potential to impact financial markets reveals a study commissioned by the German Finance Ministry. The study was conducted by South Pole Group jointly with CSSP - Center for Sustainable and Social Products, the University of Hamburg and Munich Re as a network partner.
The objective of the analysis was to assess the risks from climate change to financial market stability. While physical risks related to climate change have up to 2030 a very minimal risk of impacting financial market stability in Germany, transitional risks pose a much higher threat: a sudden pricing of the economic costs of climate change into financial markets, such as an abrupt and considerable adjustment of carbon prices, for example, could lead to significant losses. If such an event were combined with other financial market risks, this could pose a threat to overall market stability. On the other hand, an orderly transition to a financial market that is in line with international climate goals would in turn support financial market stability.
At present, the pricing and risk assessment of climate risks to financial actors varies greatly and lacks standardisation. While data on the greenhouse gas emissions of companies is available, there is a need for further data especially with respect to the global goal of keeping global warming within the 2°C threshold. Moreover, further research on concentration risks of individual actors and the contamination channels between financial actors will be of crucial importance going forward.
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