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The green swan brings a clear message from people who should know: bankers say the climate crisis means major change lies ahead.

LONDON, 10 February, 2020 − There’s more than a touch of déjà-vu about The green swan, another alarm call from the serious world of senior bankers about what the future is likely to hold.

Way back in 2006 the British economist Lord Nicholas Stern wrote his review warning of the serious impacts of climate change, in particular its effect on the global economy and the world’s financial systems.

For a brief period it seemed people were listening. Then, in 2008, the global financial crisis came along – a crisis caused, not by climate change but primarily by reckless bank lending, weak regulation and a sustained bout of greed.

World leaders panicked as the financial sector went into meltdown. Multi-billion dollar rescue packages were thrown about like confetti. Amid the panic, Stern’s warnings were largely forgotten.

It’s only recently that bankers and financiers have been revisiting his work and waving their own red flags about the dire consequences of a warming world.

The publisher of this book – the Bank of International Settlements (BIS) – is the central bank to the world’s central banks, its goal to preserve overall global monetary and financial stability. It is a conservative, some might say staid, institution, its utterances normally carefully calibrated and moderate in tone.

“Green swan events may force central banks to intervene as ‘climate rescuers of last resort’ and buy large sets of devalued assets”

The green swan is different: it graphically describes the sense of urgency now evident in banking boardrooms about global warming, the dire state of the planet and the consequent effects on the finance sector.

“Exceeding climate tipping points could lead to catastrophic and irreversible impacts that would make quantifying financial damages impossible”, say the authors.

“Avoiding this requires immediate and ambitious action towards a structural transformation of our economies, involving technological innovations that can be scaled, but also major changes in regulations and social norms.”

In other words, in non-banking terminology, expect the unexpected. Unless major international action is taken, climate change is going to cause lasting damage to the global economic and financial systems.

The “green swan” in the book’s title is a mutation of the concept of the “black swan” made famous by Nicholas Taleb in a 2007 book of the same name.

Key differences

Taleb used the term black swan to characterise random, unexpected events such as terrorist attacks or natural catastrophes and their impact on economies and financial systems. Uncertainty becomes a major factor: calculating risk in such circumstances is a very difficult, if not impossible, business.

This book’s authors characterise climate change in a similar way, talking of green swan events. But they draw some important distinctions.

Though the effects of global warming are highly uncertain, there is a high degree of certainty that major change is on the way. There is also certainty about the need for urgent action.

“Climate catastrophes are even more serious than most systemic financial crises”, say the authors.

“The complex chain reactions and cascade effects associated with both physical and transition risks could generate fundamentally unpredictable environmental, geopolitical, social and economic dynamics.”

The authors warn about central banks being caught in what they refer to as the uncharted waters of climate change. If government and other agencies don’t take action, the world’s central banks might not be able to ensure financial and price stability.

Ending fossil fuel

Fossil fuel companies could go to the wall. While this might be good for the climate, it would create financial turmoil.

“Green swan events may force central banks to intervene as ‘climate rescuers of last resort’ and buy large sets of devalued assets, to save the financial system once more.”

The warnings from the BIS are only the latest broadside from central bank authorities on the dangers of a warming world. Late last year the Bank of England, the UK’s central bank, announced it would be subjecting the country’s banks and insurance companies to a climate change-related stress test.

In recent days Singapore’s central monetary authority has introduced similar measures to test finance institutions’ preparedness in the face of global warming.

The overall message is clear: if you see a green swan, beware. A big climate change event is happening, and turmoil is on the way. − Climate News Network

* * * * *

The green swan: Central banking and financial stability in the age of climate change

An ebook by Patrick Bolton et al. published by the Bank of International Settlements/Banque de France

The green swan brings a clear message from people who should know: bankers say the climate crisis means major change lies ahead.

LONDON, 10 February, 2020 − There’s more than a touch of déjà-vu about The green swan, another alarm call from the serious world of senior bankers about what the future is likely to hold.

Way back in 2006 the British economist Lord Nicholas Stern wrote his review warning of the serious impacts of climate change, in particular its effect on the global economy and the world’s financial systems.

For a brief period it seemed people were listening. Then, in 2008, the global financial crisis came along – a crisis caused, not by climate change but primarily by reckless bank lending, weak regulation and a sustained bout of greed.

World leaders panicked as the financial sector went into meltdown. Multi-billion dollar rescue packages were thrown about like confetti. Amid the panic, Stern’s warnings were largely forgotten.

It’s only recently that bankers and financiers have been revisiting his work and waving their own red flags about the dire consequences of a warming world.

The publisher of this book – the Bank of International Settlements (BIS) – is the central bank to the world’s central banks, its goal to preserve overall global monetary and financial stability. It is a conservative, some might say staid, institution, its utterances normally carefully calibrated and moderate in tone.

“Green swan events may force central banks to intervene as ‘climate rescuers of last resort’ and buy large sets of devalued assets”

The green swan is different: it graphically describes the sense of urgency now evident in banking boardrooms about global warming, the dire state of the planet and the consequent effects on the finance sector.

“Exceeding climate tipping points could lead to catastrophic and irreversible impacts that would make quantifying financial damages impossible”, say the authors.

“Avoiding this requires immediate and ambitious action towards a structural transformation of our economies, involving technological innovations that can be scaled, but also major changes in regulations and social norms.”

In other words, in non-banking terminology, expect the unexpected. Unless major international action is taken, climate change is going to cause lasting damage to the global economic and financial systems.

The “green swan” in the book’s title is a mutation of the concept of the “black swan” made famous by Nicholas Taleb in a 2007 book of the same name.

Key differences

Taleb used the term black swan to characterise random, unexpected events such as terrorist attacks or natural catastrophes and their impact on economies and financial systems. Uncertainty becomes a major factor: calculating risk in such circumstances is a very difficult, if not impossible, business.

This book’s authors characterise climate change in a similar way, talking of green swan events. But they draw some important distinctions.

Though the effects of global warming are highly uncertain, there is a high degree of certainty that major change is on the way. There is also certainty about the need for urgent action.

“Climate catastrophes are even more serious than most systemic financial crises”, say the authors.

“The complex chain reactions and cascade effects associated with both physical and transition risks could generate fundamentally unpredictable environmental, geopolitical, social and economic dynamics.”

The authors warn about central banks being caught in what they refer to as the uncharted waters of climate change. If government and other agencies don’t take action, the world’s central banks might not be able to ensure financial and price stability.

Ending fossil fuel

Fossil fuel companies could go to the wall. While this might be good for the climate, it would create financial turmoil.

“Green swan events may force central banks to intervene as ‘climate rescuers of last resort’ and buy large sets of devalued assets, to save the financial system once more.”

The warnings from the BIS are only the latest broadside from central bank authorities on the dangers of a warming world. Late last year the Bank of England, the UK’s central bank, announced it would be subjecting the country’s banks and insurance companies to a climate change-related stress test.

In recent days Singapore’s central monetary authority has introduced similar measures to test finance institutions’ preparedness in the face of global warming.

The overall message is clear: if you see a green swan, beware. A big climate change event is happening, and turmoil is on the way. − Climate News Network

* * * * *

The green swan: Central banking and financial stability in the age of climate change

An ebook by Patrick Bolton et al. published by the Bank of International Settlements/Banque de France