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Highlights from the ECB’s work on climate-related financial risks and opportunities

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It is now almost universally agreed that the impact of climate change will prompt fundamental changes to the global economy, including the financial sector. The financial system can play a crucial role in financing the transition towards a climate-neutral economy, but at the same time it may be prone to climate-related risks that need proper management. In view of the upcoming COP 26 UN meeting and drawing on ECB analytical work, Wouter Coussens, Irene Heemskerk, Wieger Kastelein and Michael Wedow argue that additional tools and ambitious policy reforms are needed to reach both objectives.

The long-term nature of climate risks, the uncertainty about how these risks will manifest over time as well as their mutual interdependence pose a significant challenge. Climate-related risks to the economy and financial sector are usually divided into two categories. Physical risk is the economic impact stemming from the expected increase of natural hazards,…

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