Where to for climate risk regulation?

Sergio Scandizzo and Tony Hughes

We have explored a wide range of issues associated with the assessment of climate risk in the context of modern banking portfolios. We have also critically discussed the rhetoric used and approaches taken by financial regulators with regard to these issues. In the last chapter we discussed the mandate afforded to financial officials, arguing for an expansion in responsibilities to include environmental stability. The critical point stemming from this discussion is that central banks should be free to use all the tools available to them to drive the net zero agenda, even if the association between climate factors and financial stability remains relatively weak.

This position is likely to attract criticism from purists, who will argue that government financial authorities already have important responsibilities that may come into conflict with efforts to promote climate sustainability.

This is certainly a risk. For example, if financial regulators establish rules that advantage somewhat more expensive green energy production over cheaper options that pollute the environment, there are likely to be consequences for inflation that will need to be offset with higher interest rates. The