What Role for Financial Supervisors in Addressing Systemic Environmental Risks? Sustainable Finance Lab Working Paper

Since the global financial crisis, financial supervisors have developed a new macroprudential policy framework: mechanisms to identify systemic financial imbalances and instruments to address these. At the same time, a literature is rapidly developing on financial shocks that may originate from ecological imbalances, triggered by either intensified environmental policies to protect ecological boundaries or due to the economic costs of crossing these. However, financial supervisors have so far given little attention to this ecological dimension. This allows systemic financial imbalances resulting from ecological pressures to build up and concentrate in financial institutions and markets. This paper sketches the ecological dimension of the macroprudential policy framework and illustrates the working for the case of carbon emissions.