Finance, climate and ecosystems: a literature review of domino-effects between the financial system, climate change and the biosphere

Climate change and biodiversity loss represent a potential threat to financial stability by increasing and creating novel forms of poorly understood market, credit, liability and operational risks. Until now there is no overview of the main mechanisms, methodologies, and impacts of such finance-related risks. This paper presents a systematic synthesis of 75 publications, and offer a detailed overview of this growing body of literature. We develop a typology of cascading effects across climate-ecology-finance, and identify possible gaps in current understandings of global change induced financial risks. Our review shows that there is a growing interest in climate related risks in the literature, yet their connections to ecological change is systematically underdeveloped. While an increasing number of methods have been developed in the last years, such as IAMs, scenario-based analyses, and network-based stress testing, there is little consensus and standardization on methods and practices for risk evaluation and reporting, and a lack of data availability for conducting climate change and other nature-related finance risks analyses. Most models continue to oversimplify the financial system and its linkage to the economy and the biosphere, despite growing efforts to address system connections and complex systems behavior. Early economic estimates in the literature indicate that climate change and biodiversity and ecosystems’ loss are costly, together compromising 4-15% of the global GDP. Our findings also show that existing research is skewed towards European and USA-based financial institutions, thus risk and impact analysis on other countries and large economies such as India, China and Brazil are unstudied.

Keywords: Cascading effects, climate change, ecosystem loss, finance risks, systemic risks

Sanchez-García. P.A., V. Galaz, J. Rocha.. 2022. Beijer Discussion Paper 278: Finance, climate and ecosystems: a literature review of domino-effects between the financial system, climate change and the biosphere. Beijer Discussion Paper Series.