by Michel Klompmaker
The Green Swan is a book written by qualified professionals from the Banque De France and the Bank for International Settlements (BIS). It examines the link between the effects of climate change and the stability of the financial sector. It also provides an in-depth survey of how global warming has slowly integrated into macroeconomic models and how they have progressively evolved to form better assessments of stability risks that arise from the phenomenon of climate change. On the other hand, this book also acknowledges the limitations of models and how they may not be able to accurately foresee the financial and economic impact of climate change.
Climate change brings about immense challenges that adversely affect society, and central banks and supervisors cannot see themselves as being unaffected by the risks that lay ahead. The intensity and frequency of extreme weather events may bring about irreparable financial losses that would make it impossible to determine the financial damages. The technological capacity, social norms, changes in regulations and a structural change in economies required to fight back against climate change could have long-lasting effects on all agents in the economy and all single asset prices.
For this reason, global warming may result in ‘green swan’ events and could also be the result of the next financial crisis. Due to the impending risks that climate change poses, the use of traditional risk assessment models can no longer provide a proper, full appreciation and perspective on such risks. However, an ‘epistemological break’ has been reached in the financial sector, which allows for better developed future approaches that are rooted in scenario-based analyses. These new outlooks have already been incorporated in the financial sector’s risk framework agenda.
The Green Swan book also makes a point to mention that no model, either traditional or modern, can provide a full picture of the risks that the financial community is bound to face in the age of climate change. Moreover, the climate phenomenon is also bound to push the financial sector into new directions that they have never previously encountered. Green Swan events could push central banks to become involved and buy up big sets of devalued assets to safeguard the financial sector again. However, seeing as central banks should not simply take the place of government and private actors due to them taking insufficient, proactive action against these risks, central banks will need to begin raising attention to more enhanced and coordinated calls for change.
Central banks will also need to coordinate their efforts with other involved actors who will implement a wide array of measures, which are the government, the private sector, civil society and the international arena. This book also highlights that taking coordinated action will be no simple task, but it will be absolutely essential to preserving long lasting financial and price stability in the face of global warming.
The Risk & Compliance Platform Europe attended the conference in Basel, Switzerland on January 20 where this book was presented for the very first time. Three of the five authors also attended the event and some of them gave an interesting presentation related to the content of this book. The authors that did attend were Frédéric Samama, Luiz Awazu Pereira Da Silva and Romain Svartzman.
A PDF version of The Green Swan can also be obtained for free of charge on the BIS website via the following link: https://www.bis.org/publ/othp31.htm. There are also 26 pages of references that were used for the book.
