Climate Change as a Threat to Financial Stability: Can Solutions to This Problem Accelerate the Transition to a Low-Carbon Economy? A Critical Review of Policy and Market-Based Approaches

Abstract

Sustainable finance has so far been primarily defined through two complementary approaches, one centred around the notion of impact, the other one around risk management. This twofold theory of change, also formalised in the EU Sustainable Finance Action Plan, requires deeper scrutiny when applied to the banking sector, in the context of the Basel accords and their aim to foster financial stability. This chapter sets out to answer the question of whether the risk management or financial stability goal, decoupled from its impact twin, can—from a theoretical perspective and based on a critical review of models embedded in policy and market-based solutions—achieve the objectives of sustainable finance.