Invest
Climate change may trigger next GFC, BIS warns
The world’s most powerful central banks have issued a warning to other central banks around the world that moving too fast or too slow on climate change could trigger the next financial crisis.
Climate change may trigger next GFC, BIS warns
The world’s most powerful central banks have issued a warning to other central banks around the world that moving too fast or too slow on climate change could trigger the next financial crisis.
In a report called Central banking and financial stability in the age of climate change, the world bank highlighted that the “disruptive” shift in asset prices could spark a “green swan” event leaving some economies unviable.
The Bank of International Settlements (BIS) referred to “green swans”, which it uses to describe highly unexpected events that have a wide-ranging or extreme impact.
The BIS believes green swan events may force central banks to intervene as “climate rescuers of last resort”.
This could involve spending billions of dollars on devalued assets “to save the financial system one more time”.
The report found that “pursuing the current trends would leave central banks exposed and would become untenable, given that there is little that monetary policy and cash flows can do against the irreversible impacts of climate change”.
“In other words, a new global financial crisis triggered by climate change would render central banks and financial supervisors powerless.”
However, the bank also acknowledged that moving too fast towards climate change also has large ramifications for an economy.
“Transition risks are associated with the uncertain financial impacts that could result from a rapid low-carbon transition, including policy changes, reputational impacts, technological breakthroughs or limitations, and shifts in market preferences and social norms,” the report noted.
“In particular, a rapid and ambitious transition to lower emissions pathways means that a large fraction of proven reserves of fossil fuel cannot be extracted, becoming stranded assets, with potentially systemic consequences for the financial system.”
For instance, an archetypal fire sale might result if these stranded assets suddenly lose value, “potentially triggering a financial crisis”, the report said.
While suddenly eliminating fossil fuels has implications on the economy, delaying and letting the impacts of climate change set in will also hurt the economy in the future.
“In contrast, delayed and weak action to mitigate climate change would lead to higher and potentially catastrophic physical risks, without necessarily entirely eliminating transition risks. Delayed actions followed by strong actions in an attempt to catch up would probably lead to high both physical and transition risks,” the BIS said.
This could have an impact on agricultural yields, lead to frequent resource shortages or a loss in hours worked due to increasing heat waves, which would reduce output and create demand shocks such as reducing household wealth and consumption.
The BIS said central banks around the world could “inevitably be led into uncharted waters in the age of climate change”, as slow to react government exposes central banks to the risk of not being able to ensure financial stability, while moving quickly could force the bank to act as saviour today.
The central bank offered a number of solutions that central banks could help against the climate change threat, including carbon taxes and green bonds.
“A carbon tax, for example, creates an incentive for economic agents to lower emissions by switching to more efficient production processes and consumption patterns,” the BIS report noted.
However, the BIS said that because carbon taxes could “skyrocket” in a very short time, financial stability could be threatened by volatile asset prices.
The BIS also explored green bonds, which it launched in September last year as a new vehicle that facilitates central banks’ investments in green bonds.
Read more about GFC here.
About the author
About the author
Investment insights
How Aussies can invest like Warren Buffett
Arguably the most successful investor of the modern age, Warren Buffett is still the chairman and CEO of Berkshire Hathaway at 90 years old, and currently has a net worth of over $100 billion, writes ...Read more
Investment insights
Pahari leaves AMP as it pursues demerger
In yet another twist, AMP has announced its intentions to pursue a demerger of its private markets business, a move that has seen it kill off its takeover negotiations with Ares Management and Boe Pah...Read more
Investment insights
Business warned on COVID vaccine policy backlash
Businesses that pressure staff into getting a COVID-19 vaccine are being warned they could face discrimination, harassment, bullying and employment abuse claims, according to an industry expert. ...Read more
Investment insights
5-step guide to teaching kids about money
It’s never too early to start teaching kids about money and how to manage it. With the added challenges associated with COVID, it’s never been more important either! ...Read more
Investment insights
Why ethical investing is at a tipping point
Best-selling author Malcolm Gladwell said it best: “Look at the world around you. It may seem like an immovable, implacable place. It is not. With the slightest push – in just the right place – ...Read more
Investment insights
Ares withdraws from AMP bid as wealth manager’s financial results spell trouble
The bad news keeps rolling in for AMP, with the wealth manager reporting a significant drop in profit as its US bidder, Ares Management Corp, announces that it is backing out. ...Read more
Investment insights
‘RBA not responsible for asset prices’, governor says
RBA governor Philip Lowe has said that the Reserve Bank is not responsible for targeting asset prices, after questions were raised about the creation of raging bull markets against the backdrop of l...Read more
Investment insights
Retailers report strong HY21, with Super Retail set to refund JobKeeper
Certain Australian retailers are flourishing despite the government-mandated temporary store closures in 2020, with JB Hi-Fi reporting good sales growth and Super Retail Group pledging to hand back $1...Read more
Are you being priced out of the market? Have you got the Tuesday blues? And are you ready for the upcoming super changes?
Listen now
Are property prices set to crash? Should you jump on board the fintok craze? And how to prepare for this tax time
Listen now
Dissecting the budget and what it means for your equities, property and super
Listen now
Has the property market reached its peak; Biden’s climate summit and our sharemarket, and the upcoming budget
Listen now
Investment insights
How Aussies can invest like Warren Buffett
Arguably the most successful investor of the modern age, Warren Buffett is still the chairman and CEO of Berkshire Hathaway at 90 years old, and currently has a net worth of over $100 billion, writes ...Read more
Investment insights
Pahari leaves AMP as it pursues demerger
In yet another twist, AMP has announced its intentions to pursue a demerger of its private markets business, a move that has seen it kill off its takeover negotiations with Ares Management and Boe Pah...Read more
Investment insights
Business warned on COVID vaccine policy backlash
Businesses that pressure staff into getting a COVID-19 vaccine are being warned they could face discrimination, harassment, bullying and employment abuse claims, according to an industry expert. ...Read more
Investment insights
5-step guide to teaching kids about money
It’s never too early to start teaching kids about money and how to manage it. With the added challenges associated with COVID, it’s never been more important either! ...Read more
Investment insights
Why ethical investing is at a tipping point
Best-selling author Malcolm Gladwell said it best: “Look at the world around you. It may seem like an immovable, implacable place. It is not. With the slightest push – in just the right place – ...Read more
Investment insights
Ares withdraws from AMP bid as wealth manager’s financial results spell trouble
The bad news keeps rolling in for AMP, with the wealth manager reporting a significant drop in profit as its US bidder, Ares Management Corp, announces that it is backing out. ...Read more
Investment insights
‘RBA not responsible for asset prices’, governor says
RBA governor Philip Lowe has said that the Reserve Bank is not responsible for targeting asset prices, after questions were raised about the creation of raging bull markets against the backdrop of l...Read more
Investment insights
Retailers report strong HY21, with Super Retail set to refund JobKeeper
Certain Australian retailers are flourishing despite the government-mandated temporary store closures in 2020, with JB Hi-Fi reporting good sales growth and Super Retail Group pledging to hand back $1...Read more
More articles
Website Notifications
Get notifications in real-time for staying up to date with content that matters to you.
