Climate change and the financial system

There is growing awareness of the fact that the financial system can play a major role in achieving the global climate and sustainability targets by driving new green investments. However, financial actors are not pricing yet climate risks and opportunities in their portfolios’ risk management strategies, thus exposing investors, the economy and society to new sources of financial instability from carbon stranded assets. In this article, we present the characteristics of climate financial risks, we discuss why traditional approached don’t allow to integrate such risks in climate scenarios and why it matters for climate and financial policies' assessment. Then, we discuss a growing stream of research in climate finance risk metrics and methods (e.g. Climate Value at Risk, Climate Spread, Climate Stress-test) to assess investors’ exposure to forward-looking climate risks, price such risks in financial contracts and investors’ portfolios, and evaluate the largest losses that could lead to financial instability.