25 Jan 2022, 13:30
Benjamin Wehrmann

Policy reactions to climate change growing factor for financial stability – German central bank

Clean Energy Wire

Climate action policies and the ability of the economy to cope with them will become a defining factor for the financial system’s stability, the German central bank Bundesbank has said in a report. “Different sectors will not only be hit in varying intensities by climate change itself, but also by climate policies,” the central bank said, adding that climate policies are also showing effects on inflation. The central bank analysed the effects of a heating climate and political countermeasures on economic growth, individual sectors of the economy and the stock market. It concluded that the damaging effects on economic growth initially could be caused by “resolute” emissions reduction measures like carbon pricing but would help stabilise the system in the long run by reducing direct climate change costs. Improving the instruments of financial analysis is necessary to really gauge the extent and impact of climate policies’ effects on monetary aspects, it argued. Regarding the stock market, the Bundesbank found that out of 5,200 listed companies, about seven percent could experience severe losses in value, especially those focused on fossil fuels. “Climate-related changes in value and the question of climate-caused stranding of particular assets will likely play an important role on financial markets,” the bank said. It added that sectors like mining, energy production, cement and steel production, but also aviation, would be especially exposed to climate-related risks. Planning security in climate policy would therefore be a key aspect to safeguard the economy from shocks.  

The new head of the German central bank, Joachim Nagel, at the beginning of the year said combating climate change is a key task for the Bundesbank that will require “a restructuring of our economy.” Already in 2020, the European Central Bank (ECB) in its financial stability review urged banks and "the rest of the financial system" to step up efforts "to manage the financial stability risks posed by climate change.

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