"Given the potential far-reaching consequences of climate change, central banks are rightfully taking a greater interest” – Deputy Governor Sharon Donnery

• Climate related risks affect everyone – governments, companies and households, across countries and continents. Mitigating these risks requires co-ordination between everyone.
• Adjusting to a lower-carbon economy will involve changes in policy to encourage shifts in consumption and investment. This will have implications for both economic activity and asset prices.
• The Central Bank will do its part to better understand and address the link between climate-related risks and the financial system and to put in place the right policies and protections to guard against these risks.

Speaking at the Department of Finance and Sustainable Nation Ireland Conference, Deputy Governor of the Central Bank, Sharon Donnery, discussed the risks and opportunities from climate change. She said that while climate change is a highly unusual source of risk to the financial system, recent efforts mean that there is a growing consensus over the channels through which climate change can affect the financial sector.

She said that climate risks are unusual for a number of reasons. The effects are broad-based in nature - they affect all types of economic actors, sectors of the economy and regions. There is a very high degree of certainty that these risks will crystallise at some point in the future, but the timing, nature and scale of the risks is highly uncertain. Finally, the time households, companies or governments have to plan to manage these climate-related risks is probably longer than their typical planning cycle.

She added that the economic cost and financial losses from more frequent and more severe extreme climate change-related weather events are already evident.

“The most direct link from physical risks to the financial system is through the insurance sector. If households and businesses cannot insure themselves against some of the physical risks, they will bear all the costs of climate-related shocks. This reduces resilience”, she said.

She noted that while there are a number of risks related to climate change, that should not distract from the fact that these trends also bring significant opportunities for the financial sector. “Ensuring success will require technological innovation and investment. And, while there is a role for public investment, a significant part of the adjustment will fall to the private sector”, she added.

Recognising the importance of climate change to the future resilience of the financial system the Central Bank has recently joined a new coalition of central banks and supervisors – the Network for Greening the Financial System – to ensure that the financial system is resilient to climate related risks. Deputy Governor Donnery said the Central Bank will do its part to better understand the link between climate-related risks and the financial system and to put in place the right policies and protections to guard against these risks and to foster a greener financial system.

She concluded, “The challenge that we all face from climate change is immense. In line with our mandate to assess all risks to financial stability and to provide independent economic advice, the Central Bank of Ireland necessarily takes a long view. Given the uncertainty around climate-related risks, this long-term view is essential. Central banks must always be cognisant of the longer-term costs associated with action, or inaction. We all must play a part in meeting this challenge.”