Introduction

Sergio Scandizzo and Tony Hughes

There is clear scientific evidence that climate change poses a threat to human well-being and planetary health. Global coordinated efforts on adaptation and mitigation are the only way to stand a chance of still ensuring a liveable and sustainable future. At the same time, financial institutions along with central banks and financial regulators have been trying to understand the connection between climate change and the financial system, and in particular how climate change and the shift to a carbon-free economy could affect economic and financial stability. The key idea is that a combination of climate-related factors, such as extreme climate events and consequent sudden policy shifts, could lead to financial losses for companies and distress for households, which might in turn affect financial institutions through defaults and reduced market values. Valuations may also suffer in more gradual adaptation scenarios as brown assets are substituted and become “stranded”. If this drop in asset prices is sufficiently substantial, it could trigger a financial crisis with widespread economic and social consequences.

This concern for financial stability is at the core of prescriptive