The International Monetary Fund is examining the impact of climate on the world's financial markets and whether it is priced into market valuations, the head of the global lender's markets division said. We are doing work on the pricing of climate risks and to what extent it is priced into stock and bond markets, Tobias Adrian, financial counsellor and director of the IMF's monetary and capital markets department told. We are going to look at stock markets country by country, then by sector.
- The financial cost of climate change was the subject of many discussions at the IMF during its fall meetings this week.
- People are more and more aware of this - there's a certain urge around climate that is new, Adrian said.
- It's very hopeful that people focus on it, but the reason they focus is that they're worried. The fact that this really has become a big topic at the IMF speaks for itself.
- Adrian said that to some economies, climate poses a short-term risk, such as in the Bahamas, which was slammed by Hurricane Dorian in September. However, to most economies, the risks are long term.
- Some investors have become concerned that climate risk is underpriced in residential mortgage-backed securities, or RMBS, which are pools of home loans sold to investors, with exposure to climate hot spots like Texas and Florida.
Relationship between climate risks and the financial market
- Both physical and transition risks can have multiple impacts on the financial market. These can be directly on the financial market (primary effects), indirectly through investment by financial market players in impacted financial assets (secondary effects), or further indirectly through investment in impacted financial market actors (tertiary effects).
- This study examines four subject areas: physical risks, transition risks, pricing of risks and information required by investors for sensible management of these risks.
- Physical consequences of climate change, such as extreme weather events, can cause direct risks for the financial market in the form of higher and more volatile losses for the insurance industry and possible operational risks such as the closure of bank branches in case of extreme events.