Accounting for Finance is Key for Climate Mitigation Pathways

Irene Monasterolo has been invited by the International Monetary Fund (IMF) to conduct an internal seminar as part of the Macrofinancial Seminar Series, which features analytical work to help inform and support greater integration of macrofinancial issues in Fund surveillance and operations.

The Network for Greening the Financial System has developed climate mitigation scenarios of orderly and disorderly transitions to support investors and financial supervisors’ assessment of climate-related financial risks. However, these scenarios do not account for the role of the financial system (e.g., investors, markets, and instruments), implicitly assuming that financing is provided by investors without risk assessment. Missing the feedback loop between the financial system and mitigation scenarios limits our understanding of the dynamics and the feasibility of the low-carbon transition, and to an underestimation of risk across mitigation scenarios. For instance, an orderly transition could become unfeasible if the financial system has an hampering role, as a result of its risk assessment.

In a recent article in Science, Prof. Monasterolo and her coauthors develop and apply a methodological framework to connect climate mitigation scenarios and financial risk assessment in a circular way, capturing the interdependence among investors’ perception of future climate risk, the credibility of climate policies, and the allocation of investments across low and high carbon assets.

The framework and results have implications for

(i) the use of scenarios in climate stress-test exercises,

(ii) the criteria used by central banks to identify eligible assets in their collateral frameworks and purchasing programs, and

(iii) the design of an optimal carbon tax.

She will present her paper: "Accounting for Finance is Key for Climate Mitigation Pathways" co-authored with:

• Stefano Battiston, Department of Banking and Finance, University of Zurich, Zurich.
• Keywan Riahi, Research Group Leader, Sustainable Service Systems, International Institute for Applied Systems Analysis (IIASA)
• Bas J. van Ruijven,  International Institute for Applied Systems Analysis (IIASA)

Irene Monasterolo is Professor of Climate Finance at EDHEC Business School and EDHEC-Risk Institute in Nice, France. She is also a senior research fellow at the Vienna University of Economics and Business and Boston University, as well as a visiting scholar at the International Institute for Applied Systems Analysis. Her recent publications also include Battiston, S., Dafermos, Y., Monasterolo, I., 2021, “Climate risks and financial stability”, Journal of Financial Stability, Vol 54, 10.1016/j.jfs.2021.100867.