THE GREEN SWAN: CLIMATE CHANGE AND SYSTEMIC RISK IN THE FINANCIAL SYSTEM

Abstract

Climate change poses a novel and existential threat to the global financial system. Its potential to trigger a "Green Swan" event - a highly disruptive, low-probability, and high-impact financial crisis - demands immediate attention from policymakers, regulators, and financial institutions. This article explores the intricate relationship between climate change and systemic risk, delving into the transmission channels through which physical and transition risks can destabilize financial markets and economies. We analyze the limitations of traditional risk management frameworks and propose a comprehensive set of recommendations for building a climate-resilient financial system. These include: (i) integrating climate risk assessment into financial regulation and supervision; (ii) promoting market transparency and disclosure of climate-related risks; (iii) developing stress testing scenarios that capture the interconnectedness of climate impacts; (iv) fostering green finance and innovation; and (v) enhancing international cooperation and knowledge-sharing. Embracing these recommendations can safeguard financial stability, facilitate a just transition to a low-carbon economy, and ultimately prevent the Green Swan from taking flight.