Environmental risks have dominated the agenda of political leaders for four years and on an increasing scale, a sign that attention to the environment goes beyond the fad. In 2020, environmental risks put technological risks on the sidelines. Ten years ago, economic, geopolitical and social risks prevailed. The scenario has changed radically, according to World Economic Forum which has been focused, since last year, on discussions about dilemmas created by extreme temperatures, failure in climate action, natural disasters, loss of biodiversity and human-caused environmental disasters. Complex, the new order is already part of the routine of central banks and financial institutions, informs the Propague Institute in the second edition of its executive report – the Letter Spread.
Created in 2019 by Stone to disseminate regulatory trends of the financial system, especially given the popularization of means of payment that has been providing inclusion and financial education, the institute details the main themes that align local finances with international ones.
“The Letter is another authorial product of the Institute, in it we explore the main topics of the financial system that are being debated around the world”, he informs the EXAME IN Bernardo Piquet, director of Instituto Propague. “This research work is published in a periodic monitoring and analysis report on regulatory trends for the sector that can be downloaded free of charge from the Institute’s website”, he says.
In its second edition, Carta Propague deals with sustainability in the financial system – a theme dear to the central bank of Brazil, which has sustainability as one of the 5 pillars that guide its policy of modernization of the National Financial System. The other 4 pillars are inclusion, education, competitiveness and transparency.
Climate change and its consequences took global breath after being identified by the International Monetary Fund (IMF) e Bank for International Settlements (BIS) – recognized as the Central Bank of central banks – as risks to financial stability, in addition to social and environmental concerns.
“The possibility of systemic crises deriving from the impact of climate change on the financial system was summarized by the BIS in the concept of the Green Swan, inspired by the Black Swan coined in the 2008 global financial crisis and associated with rare, unpredictable and catastrophic events. The Green Swan is different in that it is not rare: it is a certainty if there are no immediate actions to contain it”, says Carta Propague.
In less than a year since BC do Brasil announced the sustainability pillar, the report informs that discussions about the impact of climate change on the economy have accelerated in the world, with a significant increase in the number of reports, speeches and public consultations. Much of this vast material is devoted to mapping financial risks imposed by negligence on the environment or weather disasters that drastically affect insurers. Weather-related losses have quintupled since 1980, jumping from an annual average of $10 billion to today’s $50 billion.
Physical and transitional risks
Carta Propague explains that two groups of risk are considered when it comes to climate change affecting the financial system: physical risk and transition risk.
O physical risk it is associated with the loss of goods and infrastructure necessary for the development of economic activities due to the increased frequency of extreme events such as floods, droughts and extreme temperatures. O transition risk it is associated with political, technological, legal and market transformations that are necessary for the economy to function in low carbon. Experts consider that the transition could represent major changes in the value of assets or costs of doing business in certain sectors of the economy. One example is the change in the energy matrix from fossil fuels to renewable ones.
International organizations seek to assess institutions’ exposure to these specific risks. And the IMF’s indicator of resilience to face transition risk was, on a global average, 0.58 in 2019, considering a scale from 0 to 1, where 0 is high resilience and 1 is low. In Brazil, the resilience indicator is 0.65.
Much of South America has indicators worse than the world average, suggesting that the emphasis given by the BC to the sustainability regulatory agenda is justified, says Carta Propague. This importance can be exemplified in the scenario where, if it takes too long to initiate a transition, Brazil may face capital flight to places where sustainability criteria are met. If it transitions too quickly, it can destabilize the economy with a sudden shift in asset values, among other developments such as possible mass unemployment and disruption of production lines.
There are several channels and repercussions considered for the materialization of physical and transitional risks. Credit risk, of market, of liquidity, of sure e operational they are financial and contagious to the system. A sign that the consequences can be profound is the chain of transmission of these risks. It starts with impacts on sovereign bonds, goes through companies, investments, appreciation of shares and other assets, and is completed by hitting families. As can be seen, central banks are looking to the future.
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