Inflation and financial stability can be affected by climate change
News Climate change will have an impact on society, the economy and participants in the financial system. So will the measures taken to mitigate climate change. This poses risks to both monetary policy and financial stability, and thus affects the Riksbank’s core tasks. It is therefore important that the Riksbank analyses these risks and takes them into account in its policy work. The Riksbank's Climate Report is published today, and it describes how the Riksbank works with climate-related risks and what challenges exist.
Price stability and financial stability are mainly jeopardised by physical and transition risks. Physical risks include fires caused by drought, as well as torrential rain and floods that cause damage to people, animals, nature and property. Transition risks can arise when measures to reduce emissions need to be taken, which may lead to rapid changes in the price of certain assets. However, there is a considerable risk that these measures are not taken at all, or that they are insufficient and too late, which can lead to a disorderly transition.
Both physical and transition risks can lead to relative price changes that can have major consequences for the economy, have spillover effects on price and wage formation and, in the worst case, damage confidence in the inflation target. Financial risks arise, for example, if assets become stranded or lose their value. Problems could also arise if insurance companies were to stop offering insurance for assets exposed to such risks. Overall, this means increased credit risks for banks, which could affect financial stability.
Climate change is a global problem and requires global cooperation. Weakened cooperation on climate issues increases the risk of a disorderly transition. International co-operation is therefore an important part of the Riksbank's sustainability work, and the Riksbank is a member of the Network for Greening the Financial System (NGFS). The network contributes to better analyses, produces scenarios and exchanges experiences to develop climate work.
The new Climate Report describes how the Riksbank works with climate-related risks that concern monetary policy, financial stability, asset management and the payments market. The international cooperation in which the Riksbank participates to help reduce the risks of climate change is also described in the report.