Prudential Regulation of Financial and Sustainability Risks from Climate Change: Empirical and Theoretical Research on Banks, Insurers and the Wider Financial System

Dear Colleagues,

Climate change creates financial risks to the safety and soundness of banks, insurers and the wider financial system, posing a significant threat to the stability of the financial system. Climate-related financial and sustainability risks are already starting to crystallise and have the potential to increase substantially in the future. For instance, physical risks that arise from increasing the severity and frequency of climate and weather-related events may lead to a reduction in asset values, a fall in profitability and an increase in the cost of settling underwriting losses for insurers. On the other hand, adjustment towards a carbon-neutral economy may prompt a reassessment of asset values, a fluctuation in energy prices, and a deterioration of the creditworthiness of borrowers, potentially leading to credit losses. While there is a pressing need for central banks, regulators and financial institutions to accelerate their capacity to assess and manage such financial risks that may result from climate change, academic research will be a key impetus to drive and support the ongoing efforts of the financial sector and the regulatory bodies in building capacity to address these risks. However, there exists a gap in the existing literature both in terms of empirical and theoretical perspectives. It is against this backdrop that this Special Issue aims to encourage, stimulate, advance and broaden theoretical and empirical research on financial and sustainability risks from climate change and how these risks should be regulated by prudential regulators and central banks, thereby filling an important gap in the existing literature.

Prof. Dr. Mete Feridun
Guest Editor

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