Climate change may result in "green swan" events, causing the next systemic financial crisis due to the unpredictable nature of climate catastrophes, and central banks need to be more proactive in calling for broader and coordinated change to maintain financial and price stability over longer periods of time, according to a Bank for International Settlements executive.
The world could be "on the brink of observing something that might be behind the next systemic financial crisis and which we call ... a "green swan," Luiz Awazu Pereira da Silva, deputy general manager of the BIS, told journalists at the publication of a new report on central banks and climate change.
A "black swan" event is unexpected, with a wide-ranging and extreme impact, and a "green swan" would be the climate equivalent.
The report, of which Pereira da Silva is one of the authors and which does not reflect the opinion of the BIS, explains that central banks cannot be expected to be "the saviors of the world" as they were following the 2008 financial crisis and use tools such as quantitative easing to solve climate change, he said.
The BIS is an international institution owned by central banks that fosters global financial cooperation.
Central banks cannot manage alone
Physical risks, such as extreme weather, and transition risks, such as policy changes, are so interlinked with all parts of society that central banks cannot manage them alone, the report said. In addition, backward-looking risk assessment models are no longer valid for climate change, which could take a very unknown path.
Central banks have been taking the forefront in combating climate change. A group of central banks formed a network in 2017 to study ways of managing climate risk in the financial sector, and Bank of England Governor Mark Carney told BBC Radio 4's Today program recently that the financial sector is not moving fast enough to cut fossil fuel funding.
But there needs to be a change in mindset, with governments, the private sector and the financial sector all working together to tackle the problem, Pereira da Silva said.
Central banks can frame the debate by way of better monitoring, stress tests, and providing definitions around carbon and pushing for greater disclosure. But other stakeholders need to play a part.
"If these coordinated actions are not undertaken, we can foresee a worsening of the situation," he said.
He said that, if things deteriorate to a point where a "green swan" event is observed — meaning a cascading of losses in the financial sector — there is a risk that central banks would be asked to intervene as a climate rescuer of last resort.
That would mean central banks would have to intervene and buy large sets of devalued financial assets, the report said.
However, there is progress being made in addressing the causes of climate change and finding solutions through public investment, research, joint fiscal and monetary policies, and through work by multilateral organizations, Pereira da Silva said.
Coordinated action and macroeconomic policies might "ignite" a more sustainable global economic growth cycle by stimulating supply and demand, and bringing an end to deflationary forces, he said.