Work

Climate change and financial risk: Is there a role for central banks?

Year: 2025

Type: article

Abstract: We hypothesize and test how climate change (CC) impacts financial risks (FR) and the effectiveness of central banks' green policies (CBGP) in mitigating these effects. Using data from 115 countries, our analysis reveals that climate change, particularly through events like wildfires and floods, significantly heightens FR. However, CBGP is found to moderate this relationship, reducing the adverse effects of CC on FR. Specifically, two components of CBGP—requirement policies and green finance—are identified as the most effective tools in alleviating the FR associated with climate change. Additionally, our study highlights that the moderating effect of CBGP varies depending on a country's credit risk profile, with CC exerting a pronounced impact on FR in countries with large-scale credit markets.

Source: Energy Economics

DOI: 10.1016/j.eneco.2025.108320

Authors: Jun-Zhuo Wang, Paresh Kumar Narayan, Iman Gunadi, Danny Hermawan

Institutions: Xi'an Jiaotong University, Monash University, Bank Indonesia

Language: English

Topic: Sustainable Finance and Green Bonds

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Climate action

Open Access status: hybrid

Estimated APC paid: $4,280