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Researchers at the University of Zurich show how climate mitigation scenarios can be improved by taking into account that the financial system can play both an enabling or a hampering role on the path to a sustainable economic system.
To limit global warming, a profound transformation of energy, production and consumption in our economies is required. The scale of the transformation means that the financial system must have a proactive role. New green investments are needed, as well as a reallocation of capital from high to low-carbon activities. The Central Banks and Supervisors Network for Greening the Financial System (NGFS), of which the Swiss National Bank is a member, was recently established with the aim of better understanding and managing the financial risks of climate change. The climate mitigation scenarios developed by the NGFS in collaboration with the Intergovernmental Panel on Climate Change of the United Nations (IPCC) have been a major step in providing financial actors with forward looking views on how low and high-carbon economic activities could evolve over the next decades. However, at this stage, these scenarios are based on large-scale Integrated Assessment Models (IAMs) that do not take into account the dynamic nature of the financial system and its actors. "We need to consider how the risk perception of the financial system from the scenarios can change the scenarios themselves," explains Stefano Battiston, professor at the Department of Banking and Finance at the University of Zurich.