Observing the Green Swans

The risks associated with climate change, biodiversity loss, and our responses to those problems are poorly understood, because there are no historical comparisons.

LONDON – The statistician Nassim Nicholas Taleb coined the term “black swan” to describe improbable, hard-to-predict events that can have a massive impact on the economy.

The appearance of green swans is arguably more predictable than that of black swans, as climate change makes them unavoidable.

As economic activity is reallocated from fossil fuels to clean energy sources, some activities will disappear, others will emerge, and the value of “stranded assets” will plummet.

Owing to their financial-stability mandate, central banks, supervisors, and macro-prudential authorities have a central role to play in the green transition.

With an eye toward anticipating the effects of climate risk, the Banque de France was the first central bank to introduce a comprehensive climate stress test for banks and insurance companies.

The COVID-19 crisis has laid bare systemic inequities that will have to be addressed if we are ever going to build more sustainable, resilient, and inclusive societies.

This information is essential to assess physical risks to production, and it would also be useful for monitoring social and environmental governance issues more broadly.

The increased frequency and severity of weather-related disasters will gradually come to be reflected in insurance coverage and costs, affecting profitability and the default rates of loan portfolios in the banking sector.

As a recent G30 report shows, credible commitments to deliver a predictably increasing carbon price are needed to enable investors, regulators, and monetary policymakers to adjust their strategies in a forward-looking manner.

These policies must be accompanied by compensation of those most affected by a decline in purchasing power, owing, for example, to an increase in fuel prices.

Capital requirements for financial institutions could be linked to their exposure to a rising carbon price, which would change their calculated probability of defaults and losses on their portfolio.

We should expect that private equity firms will try to acquire risky oil and gas properties, develop them, and sell them at a profit.

A final key climate-policy component is mandatory disclosures of CO2 emissions and a framework for harmonizing those disclosures globally in order to enforce universal minimum standards.

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With his evidence-based, public-health approach to drug policy, US President Joe Biden is signaling that America’s longstanding strategies of repression and punishment have failed.

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