Climate change has quickly become the most important challenge in our society. Nobody can exactly predict how climate change will affect the economy and the financial system worldwide. What is certain is that financial actors have a key role to play in supporting and fostering a shift towards a low-carbon economy. In this context, central banks could have a primary function in both, tackling climate-related risks and those related to the transition and, potentially, proactively redirecting resources towards green initiatives.

Climate change is affecting (and increasingly will affect) the stability of financial systems. According to a recent economy-wide stress test developed by the European Central Bank (ECB), physical risks from climate change – such as heatwaves or floods – will increase and, as a consequence, it could raise the average default probability of the credit portfolios (up 30 per cent by 2050 for the 10 per cent most vulnerable banks to climate change in the euro area) (Schnabel 2021). Also, private financial institutions perceive this set of risks. The Bank Risk Management Survey discloses that over 91 per cent of chief risk officers of 88 financial institutions in 33 countries acknowledge climate change as a top emerging risk (Bellens 2021). Furthermore, research shows that climate change could also have remarkable implications for price stability due to spillover effects on monetary policy transmission and on inflation dynamics of physical risks related to climate change (NGFS 2020).