Module 3: Systemic Risks
Overview
In Module 3, we’re exploring more pervasive financial impacts of climate change—those that impact financial stability, public budgets and the macroeconomy. These system-wide impacts and risks are important because they have a tendency to impact whole economies, rather than just specific economic sectors or industries. That means that even businesses with little or no direct exposure to physical or transition risks may still be impacted.
One key factor influences many of these system-level impacts: correlated risk. Typically, our economy, the financial sector and governments are able to withstand some adversity, especially if it is limited to certain sectors or certain geographic regions. We can depend on unaffected areas of the economy to offset or moderate the impact of that adversity. In other words, these institutions’ risks are diversified.
But, since climate change has the capacity to simultaneously increase a broad range of risks (both physical and transitional), there is increased likelihood that systemically-important institutions will face compounding damages from materialized risks against which it is difficult to diversity (since those risks share the same main driver—climate change).
Even if those institutions are robust enough to withstand the challenges, they may nevertheless be less efficient or less able to fulfill their typical role in the economy. Indeed, the way that banks, insurers and governments respond to compounding damages may actually exacerbate a struggling macroeconomy.
In this module, we’ll take a closer look at banks, insurers, governments and the macroeconomy as a whole to explore the financial risks transmitted through these key economic institutions.