At the micro level, it will affect the economic performance of companies throughout the entire value chain, causing changes in costs, income and in some cases losses. At the macro level, it will have consequences such as capital depreciation, price changes, productivity losses and frictions in the labor market.
The global financial system has generally emerged well from the economic crisis caused by the pandemic, but it has certain vulnerabilities. We should not interpret resilience to this crisis as meaning that the system will withstand any crisis. It must be understood that the economic impact of the climate change crisis and the loss of diversity will be different: gradual, profound and permanent. It will structurally affect different regions and branches of economic activity.
The financial system has to act anticipating this situation. Failure to do so can create the conditions for a systemic problem in the future.
For the financial sector, the impact of the risks associated with climate change and the loss of nature can materialize through the traditional risks that the sector faces. For example, physical risks that affect the real sector can be transmitted in credit, operational and market risk to the financial sector.
Due to the above, it becomes necessary to evaluate and integrate climate risks and biodiversity loss within the set of risks that may affect the financial sector. The concern is shared both by the entities that are part of the financial sector and by regulators and supervisors.
Due to their fiduciary function before savers and investors, financial intermediaries have the responsibility to know, mitigate and manage the financial risks that climate change and the loss of nature bring with them. This, because they can significantly affect the business dynamics, profitability and payment capacity of their borrowers.
The financial sector will also be part of this transformation. Due to its role as an intermediary between savings and investment, it can facilitate the channeling of funds towards activities that contribute to the transition.
For the financial system, climate change also represents an area of opportunity, since initiatives with a sustainable development objective must be financed. This can contribute to the reallocation of capital towards carbon neutral assets and facilitate new sources of financing.
Financial institutions are making more and more progress in exploring the types and scope of institutional methodologies and tools for evaluating and managing risks in their investments, credit activities and portfolio management.