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Finance, climate-change and radical uncertainty: Towards a precautionary approach to financial policy

Chenet, H; Ryan-Collins, J; van Lerven, F; (2021) Finance, climate-change and radical uncertainty: Towards a precautionary approach to financial policy. Ecological Economics , 183 , Article 106957. 10.1016/j.ecolecon.2021.106957. Green open access

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Abstract

Climate-related financial risks (CRFR) are now recognised by central banks and supervisors as material to their financial stability mandates. But while CRFR are considered to have some unique characteristics, the emerging policy framework for dealing with them has largely focused on market-based solutions that seek to reduce perceived information gaps that prevent the accurate pricing of CRFR. These include disclosure, transparency, scenario analysis and stress testing. We argue this approach will be limited in impact because CRFR are characterised by radical uncertainty and hence ‘efficient’ price discovery is not possible. In addition, this approach tends to bias financial policy towards concern around avoiding short-term market disruption at the expense of longer-term, potentially catastrophic and irreversible climate risks. Instead, an alternative ‘precautionary’ financial policy approach is proposed that offers an intellectual framework for legitimizing more ambitious financial policy interventions in the present to better deal with these long-term risks. This framework draws on two existing concepts — the ‘precautionary principle’ and modern macroprudential policy — and justifies the full integration of CRFR into financial policy, including prudential, macroprudential and monetary policy frameworks.

Type: Article
Title: Finance, climate-change and radical uncertainty: Towards a precautionary approach to financial policy
Open access status: An open access version is available from UCL Discovery
DOI: 10.1016/j.ecolecon.2021.106957
Publisher version: http://dx.doi.org/10.1016/j.ecolecon.2021.106957
Language: English
Additional information: © 2021 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).
Keywords: Financial stability, Financial regulation, Macroprudential policy, Central banks,Climate-related financial risks, Climate change, Sustainable finance, Systemic risk, Low carbon transition
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of the Built Environment
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of the Built Environment > Bartlett School Env, Energy and Resources
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of the Built Environment > Inst for Innovation and Public Purpose
URI: https://discovery.ucl.ac.uk/id/eprint/10125002
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