Journal of Financial Stability 54 (2021) 100867

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Journal of Financial Stability

journal homepage: www.elsevier.com/locate/jfstabil

Climate risks and financial stability

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a r t i c l e i n fo a bs tr a ct

Available online 26 March 2021 Climate change has been recently recognised as a new source of risk for the financial system. Over the last
years, several central banks and financial supervisors have recommended investors and financial institu-
JEL Classification: tions to assess their exposure to climate-related financial risks. Central banks and financial supervisors have
E44 also started to design scenarios for climate stress tests - to- assess how vulnerable the financial system is to
G10
climate change. Nevertheless, the financial community falls short of methodologies that allow the suc-
Q54
cessful analysis of the risks that climate change poses to financial stability. Indeed, the characteristics of
climate risks (i.e., deep uncertainty, non-linearity and endogeneity) challenge traditional approaches to
Keywords:
Climate change
macroeconomic and financial risk analysis. Embedding climate change in macroeconomic and financial
Financial stability analysis using innovative perspectives is fundamental for a comprehensive understanding of the macro-
Climate policies financial relevance of climate change. This Special Issue is devoted to the relation between climate risks and
Financial instruments financial stability and represents the first comprehensive attempt to fill methodological gaps in this area
Network models and to shed light on the financial implications of climate change. It includes original contributions that use a
Stock-flow consistent models range of methodologies – such as network modelling, dynamic evolutionary macroeconomic modelling and
Agent-based models financial econometrics – to analyse climate-related financial risks and the implications of financial policies
Empirical finance
and instruments aiming at the low-carbon transition. The research insights of these contributions can in-
form the decisions of central banks and financial supervisors about the integration of climate change
considerations into their policies and financial risk assessment.
© 2021 Elsevier B.V. All rights reserved.

1. Why a special issue on climate risks and financial stability? Second, climate change introduces new sources of financial risk.
The reason is straightforward and follows from the knowledge on
While climate change has been increasingly recognised as a climate change that has been developed in the last two decades (see
major source of risk for the financial system, and the academic and e.g. IPCC, 2014, 2018). In the absence of sufficient mitigation and
policy community has started paying growing attention to climate adaptation actions, climate change implies an increasing potential
finance, there is still a significant gap in the development of meth- for adverse socio-economic impacts because of extreme weather
odologies that allow us to analyse successfully climate-related fi- events and other types of hazards, across several economic activities
nancial risks. The aim of this special issue of the Journal of Financial and geographical areas (see physical risks below). Climate policies
Stability (JFS) is to address this gap. To our knowledge, this is the first that would succeed in achieving the low-carbon transition and
special issue devoted to the relation between climate risks and fi- avoiding catastrophic climate change require a very fast and large
nancial stability. This relation has significant implications for the transformation of both industrialised and developing economies
transition to a low-carbon economy and raises significant metho- (e.g. with regard to their energy, production and consumption sys-
dological issues for the academic community. tems) in the next decade or so. This could generate significant dis-
First, climate risks’ specific characteristics (such as deep un- ruption, having adverse impacts on several economic activities and
certainty, non-linearity and endogeneity) pose fundamental chal- sectors, creating at the same time new opportunities for others (see
lenges to traditional methods for macroeconomic and financial transition risks below). These economic effects of climate change can
analysis, which are not well-suited to capturing these character- lead to adjustments in the value of financial assets owned or issued
istics. Progress in this field requires that scholars engage with the by corporate and sovereign entities. They can also have an adverse
fundamental questions raised by climate risks, moving beyond the impact on the liabilities of insurance companies and the rate of
mere rebranding of existing models under the label of “climate default on the loans provided by financial institutions. The climate-
change” or “green”. related financial transmission channels can be amplified due to

https://doi.org/10.1016/j.jfs.2021.100867
1572-3089/
© 2021 Elsevier B.V. All rights reserved.
S. Battiston, Y. Dafermos and I. Monasterolo Journal of Financial Stability 54 (2021) 100867

financial interconnectedness (Battiston et al., 2016a) and can have business and revenues depend on fossil fuel production or utilisation
important feedback effects on the real economy. will suffer losses, giving rise to the so-called “stranded assets”
Indeed, the fact that the physical effects of climate change and (Leaton, 2011; Van der Ploeg and Rezai, 2020). These losses could
the low-carbon transition have fundamental implications for a range then negatively affect the value of the firms' financial contracts and
of sectors in the economy makes climate risks relevant for the fi- of the financial portfolios exposed to those firms, such as bank loans
nancial stability of individual institutions. Further, because of the and the equity and bond holdings of pension funds (Battiston et al.,
correlation of the impacts and the interconnectedness of institutions 2017; Stolbova et al., 2018; Semieniuk et al., 2020). In addition, the
and economies, climate risk is also relevant for the financial stability high degree of interconnectedness of financial actors can further
at both national and global level. amplify losses for individual financial actors and for the financial
The implications of climate change for financial stability, in turn, sector, as it happened during the global financial crisis (Battiston
pose significant challenges to central banks and financial regulators et al., 2012, 2016a; Billio et al., 2012; Haldane and May, 2011).
(Campiglio et al., 2018). However, until very recently, financial actors and Despite the sense of urgency and policy relevance of this topic,
markets seemed not to have internalised the knowledge about climate important gaps remain in the academic research in this area. This
change risks in prices and risk metrics. Since the 2015 Paris Agreement, special issue aims at filling these gaps by publishing original con-
the financial sector has been increasingly engaging in the conversation tributions that shed new light on the sources and the impacts of
on climate change. Financial supervisors now explicitly recognise cli- climate-related financial risks and analyse possible financial policies
mate change as a new source of financial risk (e.g. NGFS, 2019; ECB, and financial instruments aiming at mitigating these risks.
2019; FSB, 2020; Despres and Hiebert, 2020; Alogoskoufis et al., 2021) In the remainder of this editorial paper, we discuss the key re-
and a number of initiatives have emerged to encourage the disclosure of search challenges for the analysis of the relation between climate
climate-related financial risks. risks and financial stability (Section 2), we provide an overview of
For instance, in 2017, the G20 Financial Stability Board (FSB) the papers included in the special issue (Section 3) and we outline
launched the Task Force for Climate-Related Financial Disclosure avenues for future research in the area of climate finance (Section 4).
(TCFD) aimed to provide investors with recommendations for dis-
closing climate change risks in their portfolios. In the same year, a 2. Climate risks and financial stability: key research challenges
group of central banks and financial supervisors established the
Network for Greening the Financial System (NGFS). In 2019, the The analysis of the macroeconomic impact of climate change has
NGFS recommended the use of climate stress tests for the assess- received growing attention in the last decade, with a focus on the
ment the financial stability implications of climate risks (NGFS, physical effects of climate change on the economy (see e.g. Noy,
2019), and in 2020 provided a set of climate scenarios that investors 2009; Burke et al., 2015; Hsiang et al., 2017; Diffenbaugh and Burke,
should consider in their climate financial risk assessments (NGFS, 2019; Hallegatte, 2019). The analysis of the relation between climate
2020). Today, climate change is an element of the assessment of fi- risks and financial stability is more recent and is characterised by
nancial institutions’ risk and, going forward, will be part of stress- research gaps in two key areas:
testing exercises (EIOPA, 2019; Grippa and Mann, 2020).
In 2016, the European Commission (EC) created the High-Level 1. The quantitative assessment of the impact of climate physical
Expert Group on Sustainable Finance (HLEG) that recommended the and transition risks on the macroeconomy and the financial
introduction of standards for the identification of sustainable invest- system, considering feedback loops and drivers of amplification.
ments. These recommendations were included in the 2018 EC Action 2. The internalisation of information about climate change in fi-
Plan for Sustainable Finance and guided the work of the EC Technical nancial valuation and portfolio risk management.
Expert Group on Sustainable Finance (TEG) (see European Commission,
2020) which culminated in the publication of the EU Taxonomy reg- 2.1. Macroeconomic and financial impacts of climate change
ulation in the Official Journal of the European Union in June 2020.1
These important and unprecedented international initiatives Addressing the gaps in the first research area requires a careful
show how relevant climate change has become for the financial consideration of the nature of climate risk. The literature has high-
stability agendas and the mandates of financial supervisors. In par- lighted several distinct features of this risk. First, it has been pointed
ticular, two channels of risk transmission from climate change to out that climate risk is systemic and non-linear (Battiston et al.,
financial stability have gained attention: 2017; Monasterolo, 2020a; Dafermos, 2021) and is characterised by
fat tails (see e.g. Weitzman, 2009; Ackerman, 2017). This means that,
• Climate physical risks: climate change could damage physical as- if not timely addressed, it can lead to tipping points in the ecosystem
sets and firms’ production capacity, increasing the credit risk of (Steffen et al., 2018; Lenton et al., 2019) that can generate prolonged
banks, inducing financial losses for the insurance sector, and socio-ecological and economic crises and hysteresis effects that
impairing governments’ financial position. prevent the environmental and economic systems to return to their
• Climate transition risks: the transition to a low-carbon economy pre-crisis status, with profound implications for financial stability. It
could lead to unanticipated and sudden adjustments of asset also means that the interconnectedness of actors plays a key role in
prices (both positive and negative) and changes in defaults for how this risk materialises; crucially, actions that might be look op-
entire asset classes, resulting in financial shocks for asset man- timal at the individual level might lead to sub-optimal outcomes at
agers, institutional investors and banks’ portfolios. the system level. Second, climate risk is endogenous, meaning that
the realisation or not of the worst-case scenarios depends on the
In the context of climate transition risk, the main threats for fi- perception of risk of the agents involved (e.g. policy makers and
nancial stability arise from a disorderly transition to a low-carbon investors) and their reaction to this perception (Battiston, 2019).
economy (NGFS, 2019), i.e. a situation in which investors fail to fully Third, climate risk involves and affects at the same time (through
anticipate the impact of the introduction of climate policies on their different channels) several dimensions of the food-water-energy
business models (Monasterolo and Battiston, 2020). Firms whose nexus, and the socio-economic activities related to that, increasing
the complexity of impacts and policy reactions (Howarth and
Monasterolo, 2016).
1
The regulation can be found at https://eur-lex.europa.eu/legal-content/EN/TXT/ The characteristics of climate risk play an important role in the
PDF/?uri=CELEX:32020R0852&from=EN assessment of the macroeconomic and financial implications of

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S. Battiston, Y. Dafermos and I. Monasterolo Journal of Financial Stability 54 (2021) 100867

climate change. They influence the design of shock scenarios, the of firms suffer from the lack of consistency across financial data
shock transmission channels and the conditions under which cli- providers (see e.g. Berg et al., 2020). The results of several empirical
mate shocks can lead to amplification and persistence (i.e., reinfor- analyses about green bonds – the most well-known green finance
cing feedback loops). In this regard, a growing stream of research has instruments – are still inconclusive on whether and under which
highlighted the limits of traditional approaches for the analysis of conditions green bonds have sizeable financial benefits for their is-
the macroeconomic and financial impacts of climate change and suers (see e.g. Karpf and Mandel, 2018; Zerbib, 2019). Analyses of
climate policies (Farmer et al., 2015; Mercure et al., 2016; Stern, financial actors’ and markets’ reactions to climate news and policy
2016; Balint et al., 2017; Dafermos and Nikolaidi, 2019; Monasterolo, announcements show that the financial system has, very recently,
2020a, 2020b). In particular, macroeconomic models like Compu- potentially started to take climate issues into account (see e.g.
table General Equilibrium (CGE) and Dynamic Stochastic General Ramelli et al., 2018; Delis et al., 2020; Monasterolo and de Angelis,
Equilibrium (DSGE) models typically assume that agents have ra- 2020). However, no definite conclusions can yet been derived since
tional expectations, that hysteresis plays no role and that the dy- the empirical results on this issue depend on how the climate per-
namic evolution of the economy is driven primarily by exogenous formance of assets is defined.
shocks. These assumptions are at odds with the deep uncertainty, A standardised classification of investments that are exposed to the
path dependency and endogeneity that characterise climate risk. risk of carbon stranded assets is still missing. The EU Taxonomy covers
Further, these models normally relegate the role of money and fi- only environmentally sustainable activities. A growing number of rating
nance to the sidelines. Although the financial system has been in- agencies and financial companies have introduced indicators of en-
corporated in many DSGE models since the global financial crisis vironmental performance and carbon intensity which are, however
(Dou et al., 2020), in the vast majority of these models this has been mostly based on backward-looking and self-reported information.
done in the context of ‘financial frictions’, without considering the Alignment methodologies, such as the Paris Agreement Climate
endogenous build-up of financial fragility (Galí, 2018), the en- Transition Assessment (PACTA) (see Spuler et al., 2020) can analyse the
dogeneity of money (Jakab and Kumhof, 2019), the interaction extent to which financial portfolios are consistent with climate targets
among heterogeneous agents (Fagiolo and Roventini, 2017), and fi- using, for instance, information about firms’ energy technology and fu-
nancial complexity and interconnectedness (Battiston et al., 2016b). ture investment plans. These alignment methodologies have contributed
Research has shown that these aspects are particularly important for to the development of forward-looking approaches to climate-related
analysing macrofinancial linkages successfully. Moreover, general financial risks. However, they do not consider how financial risk can
equilibrium models cannot capture the interaction between het- materialise across several climate mitigation scenarios (including sce-
erogeneous forward-looking expectations about climate scenarios as narios of disorderly transition) taking at the same time into account
well as how agents’ anticipation of specific scenarios can affect their network effects. The Climate Policy Relevant Sectors (CPRS) classification
realisation, giving potentially rise to multiple equilibria. addresses this limitation. The CPRS provides a granular classification of
The aforementioned features of the general equilibrium macro- economic activities based on their degree of exposure to climate tran-
economic models limit their ability to assess the financial implica- sition risks, considering their energy technology profile, their role in the
tions of climate change and the transition to a low-carbon economy.2 energy value chain and their sensitivity to changes in climate policy and
In addition, these models may give a false sense of control over the regulation (e.g. in terms of costs; see Battiston et al., 2017). Its high
ability of the economy to switch quickly enough from high to low- degree of granularity by economic activity (NACE 4-digit level) and en-
carbon investments and to manage climate-related financial risks. ergy technology (low/high-carbon) allows a direct mapping into the
This, in turn, could lead investors and policy makers to take sub- variables of climate economic models, such as the Integrated Assessment
optimal decisions at the individual and collective level, with po- Models (IAMs) that have been used in the NGFS climate scenarios (NGFS,
tentially severe implications for financial stability. 2020). The CPRS classification can also be directly incorporated into fi-
On the contrary, stock-flow consistent (SFC) and agent-based nancial network models. Several financial institutions, such as the
models are able to capture the role of non-linearities, inter- European Central Bank (ECB, 2019), the European Insurance and Occu-
connectedness, endogeneity and path dependency. They also for- pational Pension Authority (EIOPA, 2019), the Austrian National Bank
mulate explicitly the endogenous money creation process which (Battiston et al., 2020a) and the European Commission (Alessi et al.,
plays a key role in the emergence of financial cycles. Therefore, these 2019) have used the CPRS classification to assess European investors’
models are better suited to analyse the macroeconomic and financial exposure to climate transition risk.
implications of climate risk. This is why they have been increasingly
used over the last years for the macro modelling of climate-related 3. This JFS special issue on “climate risks and financial stability”
financial issues (see e.g. Dafermos et al., 2017; Bovari et al., 2018;
Monasterolo and Raberto, 2018; Lamperti et al., 2019). The special issue represents a collection of papers that analyse
the relation between climate risks and financial stability using a
variety of methodological approaches, including network modelling,
2.2. Climate change and valuation of financial instruments mathematical financial modelling, financial econometrics, stock-
flow consistent modelling and agent-based approaches. The con-
Empirical analyses of climate risk pricing in investment decisions tributions of the special issue cover (i) the impact of climate tran-
and of financial actors’ and markets’ reaction to climate change are sition policies on financial stability, (ii) the physical risks of climate
still at an initial stage. A main challenge in this area is the lack of change for the financial system, and (iii) the implications of climate
standardised information on the climate relevant characteristics of change for pricing in financial markets.
firms and financial products and the difficulty in identifying low-
carbon and high-carbon assets. Environmental Social Governance 3.1. The impact of climate transition policies on financial stability
(ESG) indices that are often used to assess the climate performance
Within the theme of climate transition risks, Roncoroni et al.,
(2021) investigate the impact, in terms of financial stability of banks
2
There are general equilibrium models that have relaxed some of the assumptions and investment funds, of the interplay between transition scenarios
mentioned above, like rational expectations (Gelain et al., 2019), the lack of hysteresis
(Engler and Tervala, 2018) and the exogeneity of money (Jakab and Kumhof, 2019).
(derived from the IPCC climate mitigation pathways) and market
However, they have done so by keeping most of the other restrictive features un- conditions (i.e. asset price volatility and levels of loss-given-default).
changed. In particular, they develop a novel approach that combines the

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S. Battiston, Y. Dafermos and I. Monasterolo Journal of Financial Stability 54 (2021) 100867

climate stress-test framework (Battiston et al., 2017) with the NEVA that is that banks interpreted the flood event as a one-off occur-
framework for Network Valuation of Financial Assets (Barucca et al., rence. This indicates that the pricing of physical risks in mortgage
2020) that accounts for asset price volatility and the endogenous lending has probably been limited so far.
recovery rate for interbank assets. They apply this framework to a Flori et al., (2021) explore empirically the interactions between
supervisory dataset of the Mexican financial system, and they show commodity prices, climate-related variables (like rainfall and tem-
that although the direct exposure of the Mexican financial system to perature) and an index that measures the degree of financial distress
CPRS is small, financial contagion effects can undermine financial in capital markets. They do so by using a combination of a multi-
stability under scenarios of disorderly transition if accompanied by dimensional graph-theoretical approach with standard econometric
weak market conditions. techniques. Their results suggest that climate-related variables affect
Using SFC modelling, Dafermos and Nikolaidi (2021) and Dunz et al., financial stability through the impact that they have on commodity
(2021) analyse the transition effects of climate financial regulation and prices.
fiscal policies. They both show that the “green supporting factor” – a
financial regulation policy that reduces capital requirements for “green” 3.3. Implications of climate change for pricing in financial markets
loans – can increase the financial fragility of banks since it leads to an
increase in credit which is supported by less bank capital. Dafermos and The implications of climate change for the pricing in financial
Nikolaidi (2021) find that these transition effects of the green supporting markets has been investigated in four papers of the special issue.
factor are reinforced when the green supporting factor is combined with Agliardi and Agliardi (2021) and Fatica et al., (2021) focus on the
green fiscal policy (carbon taxes and green subsidies). They also find that bond markets. Agliardi and Agliardi (2021) develop a model for
a “dirty penalising factor” – a financial regulation policy that reduces defaultable bonds where transition risks are captured via a com-
capital requirements for loans with a negative environmental impact – pound Poisson process. They show how bond prices can be affected
can have an adverse impact on the financial position of banks in the by an abrupt change in climate policies that takes the form of
short run by increasing the default rate of the non-financial corporate downward jumps in the value of firms, thus affecting their default
sector. probability. Fatica et al., (2021) investigate econometrically if bonds'
Regarding carbon taxes, both Dafermos and Nikolaidi (2021) and yields at issuance are lower for green bonds compared to conven-
Dunz et al., (2021) show that carbon tax policies need to be ac- tional bonds. They find heterogeneous effects: while yields are lower
companied by governments' “carbon tax revenue recycling” (i.e. the for supranational institutions and non-financial corporations, there
reivestment of carbon tax revenues) in order for the adverse dis- is no difference between the yields of green bonds and conventional
tributional and financial effects of carbon pricing to be minimised. A bonds in the case of financial institutions. They also find that green
particular innovation of the model of Dunz et al., (2021) is that it bond yields are lower in the case of repeated issuers of green bonds
incorporates banks’ climate sentiments, i.e. financial actors' ex- and when there is an external review of the green bond certification
pectations on the impact of climate policies on firms’ performance. process. An additional finding is that those banks that issue green
For istance, banks can revise their lending strategy and firms' cost of bonds tend to reduce their lending to carbon-intensive sectors.
capital as a consequence of their assessment of firms' exposure to Alessi et al., (2021) concentrate on the stock markets. Using a
climate risks. This allows, for the first time, to feedback the climate sample of companies listed on the STOXX Europe Total Market Index,
financial risk assessment by financial actors into firms' investments they first show that investors accept a lower compensation for
and policy decisions, and thus provides a more realistic under- holding stocks of companies that disclose environmental data and
standing of the role of finance in the low-carbon transition. The have a lower emission intensity. They then estimate the losses of
analysis of Dunz et al., (2021) suggests that, when banks anticipate institutional sectors at the global level under a scenario in which the
the increase in the carbon tax by revising their lending behaviour stocks of companies that have a strong environmental and disclosure
and the cost of debt (by decreasing and increasing the interest rate profile outperform the stocks of carbon-intensive companies. They
for low-carbon and high-carbon firms, respectively), they mitigate find that the losses are not quantitatively large, which is partly ex-
the impact of the energy transition on financial stability. plained by the fact that their analysis does not consider second-
round effects. They also show that a reallocation of portfolios to-
3.2. Physical effects of climate change on the financial system wards greener assets could reduce these losses.
Climate and weather derivatives can be useful financial instruments
Four papers focus on the theme of physical risks. Dafermos and for hedging climate-related risks. Bressan and Romagnoli (2021) in-
Nikolaidi (2021) and Lamperti et al., (2021) explore how climate fi- troduce a copula-based pricing methodology for multivariate climate
nance policies can reduce the long-run financial instability that and weather derivatives analysis. Employing data for Italy, they perform
stems from climate-related events and the change in climatic con- an empirical analysis which shows that the choice for the best copula
ditions. Dafermos and Nikolaidi (2021) show that the green sup- differs depending on the season under analysis. They also illustrate the
porting and the dirty penalising factor can reduce physical risks challenges related to the pricing of the climate and weather derivatives
since they lower carbon emissions by increasing credit availability and point out that the mispricing of derivatives can actually increase
for green investment and reducing credit availability for carbon-in- physical risks, undermining financial stability.
tensive investment. The impact is quantitatively small but is re-
inforced when the green supporting and the dirty penalising factor 4. Avenues for future research in climate finance
are implemented simultaneously. Using an agent-based macro-
economic model, Lamperti et al., (2021) find that policies that relax The papers of this special issue pave the way for further research
bank capital constraints for green loans can have more substantial that can fill the remaining gaps in several areas of climate finance,
beneficial effects on physical risks when they are implemented in including:
conjunction with credit guarantees for green loans and carbon risk
adjustments in banks’ credit rating. • The systematic incorporation of network financial
Garbarino and Guin (2021) investigate how banks reacted to a modelling (Battiston and Martinez-Jaramillo, 2018) into dynamic
severe flood event in England in 2013–2014. Their results show that macroeconomic approaches to climate change. This is particu-
banks did not take ex post into account flood risk in their valuation larly important for an integrated analysis of the macrofinancial
for mortgage refinancing and in their decisions about the level of the feedback loops associated with transition and physical risks.
interest rate and amount of credit provision. A potential reason for

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S. Battiston, Y. Dafermos and I. Monasterolo Journal of Financial Stability 54 (2021) 100867

• The more in-depth analysis of the conditions under which fi- Battiston, S., 2019. The importance of being forward-looking: managing financial
stability in the face of climate risk. Greening the Financial System: The New
nance could be a driver or a barrier to the low-carbon transition.
Frontier. Banque de France, Paris, pp. 39–48.
Modelling the ambivalent role of finance in climate mitigation Battiston, S., Martinez-Jaramillo, S., 2018. Financial networks and stress testing:
scenarios is fundamental for the identification of climate miti- challenges and new research avenues for systemic risk analysis and financial
gation pathways that permit the achievement of the targets of stability implications. J. Financ. Stab. 35, 6–16.
Battiston S., Monasterolo I., Riahi K., van Ruijven B.J., Accounting for finance is key for
the Paris Agreement (Battiston et al., 2021). climate mitigation pathways, Science, 28 May 2021. DOI: 10.1126/science.abf3877
• The modelling of the interactions between fiscal, monetary and Battiston, S., Puliga, M., Kaushik, R., Tasca, P., Caldarelli, G., 2012. Debtrank: Too central
financial climate policies and the analysis of the implications of to fail? Financial networks, the Fed and systemic risk. Sci. Rep. 2, 541.
Battiston, S., Caldarelli, G., May, R.M., Roukny, T., Stiglitz, J.E., 2016a. The price of
these interactions for the financial systems of specific countries. complexity in financial networks. Proc. Natl. Acad. Sci. 113 (36), 10031–10036.
• The analysis of climate-related financial risks in the context of Battiston, S., Farmer, J.D., Flache, A., Garlaschelli, D., Haldane, A.G., Heesterbeek, H.,
the COVID-19 crisis and the design of COVID-19 recovery policies Hommes, C., Jaeger, C., May, R., Scheffer, M., 2016b. Complexity theory and fi-
nancial regulation. Science 351 (6275), 818–819.
that are aligned with climate targets (see e.g. Battiston et al.,
Battiston, S., Mandel, A., Monasterolo, I., Schütze, F., Visentin, G., 2017. A climate
2020b). stress-test of the financial system. Nat. Clim. Change 7 (4), 283–288.
Battiston, S., Guth, M., Monasterolo, I., Nuerdorfer, B., Pointner, W., 2020a. The ex-
Overall, this special issue makes a contribution on how research posure of Austrian banks to climate-celated transition risk. Financial Stability
Report 40. Austrian National Bank, pp. 31–44.
can inform the debate on climate risk and financial stability. Battiston, S., Billio, M., and Monasterolo, I. (2020b). Pandemics, climate and public
Specifically, research on the above areas is key to support the fol- finance: how to strengthen socio-economic resilience across policy domains. In: A
lowing stakeholders: (i) the academic community to provide evi- New World Post COVID-19 Lessons for Business, the Finance Industry and Policy
Makers, edited by Monica Billio and Simone Varotto, Edizioni Ca’ Foscari, 259-268.
dence-based results and support policy makers in the design of ISBN: 978-88-6969-442-4
effective strategies for addressing climate-related financial risks; (ii) Berg, F., Koelbel, J.F., Rigobon, R., 2020. Aggregate confusion: the divergence of ESG
central banks and financial supervisors to introduce climate con- ratings. SSRN Electron. J., 3438533.
Billio, M., Getmansky, M., Lo, A.W., Pelizzon, L., 2012. Econometric measures of con-
siderations in their financial risk assessment tools (including stress nectedness and systemic risk in the finance and insurance sectors. J. Financ. Econ.
tests) and prudential policies, and to deliver on their price and fi- 104 (3), 535–559.
nancial stability mandates in the era of the climate crisis; (iii) in- Bovari, E., Giraud, G., Mc Isaac, F., 2018. Coping with collapse: a stock-flow consistent
monetary macrodynamics of global warming. Ecol. Econ. 147, 383–398.
vestors to disclose and assess climate risks in their portfolios and to
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Irene Monasterolo
Munich. Vienna University of Economics and Business, Austria

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Corresponding author.