How Does Climate Change Interact with the Financial System? A Survey

Abstract

We survey the growing literature on the interaction between climate change, which is likely associated with a growing intensity and frequency of natural disasters, and the financial system. Assets, in particular properties, do not adequately price in climate risks although disclosure and communication help alleviate the mispricing of assets. Further, natural disasters restrict the credit supply from affected banks even in areas not directly hit by the disaster; however, this negative impact is less severe for banks with more capital. Meanwhile, insurance provides some protection for the economy, firms, and households against the impact of natural disasters, but there are several challenges such as low coverage and moral hazard. Finally, our survey considers policy implications for financial authorities.

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